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
See In re Global Precious Metals, Inc.. 143 B.R. 204 (Bankr. N.D. Ill. 1992). Held, lack of notice does not authorize court to extend bar date; however, Code protects creditors, namely, § 523(a)(3) (lack of creditor notice renders nondischargeable claim against individual debtor); § 726(a)(2)(C) (claim not subordinated if filed late due to lack of notice); § 501(c) (debtor or trustee may file proof of claim if creditor does not file timely).
Due process should protect creditor where these provisions fail to do so. See Broomall Indus. v. Data Design Logic Sys.. 786 F.2d 401 (Fed. Cir. 1986); Reliable Elec. Co. v. Olson Constr. Co.. 726 F.2d 620 (10th Cir. 1984); United States v. Cole (In re Cole). 146 B.R. 837 (D. Colo. 1992). Unknown creditors' claims will be discharged if there is sufficient notification publication notice, usually through national newspapers. However, due process requires that known creditors receive formal actual notice of a bankruptcy case before the discharge affects their claims. A known creditor is one whose identity is either known or reasonably ascertainable by the debtor; a creditor's identity is reasonably ascertainable if that creditor can be identified through reasonably diligent efforts. Ed. Note: This protection from discharge applies equally to the United States. In the case of governmental entities, "adequate notice" must satisfy requirement of "fundamental fairness" rather than due process. However, this standard still requires that if the federal agency was a known creditor it must have received actual formal notice of a bankruptcy case before its claims are discharged. That the federal agency knew through informal means, i.e. word of mouth, that the debtor was in bankruptcy is not sufficient. If the agency was not sent the formal notices required by the Code we should be arguing that its claim is not discharged.
Priority tax claim, filed late because IRS was not notified of bankruptcy case or bar date, should be treated same as if filed timely. United States v. Cardinal Mine Supply, Inc.. 916 F.2d 1087 (6th Cir. 1990); see also United States v. Ulrich (In re Mantz). 151 B.R. 928 (Bankr. 9th Cir. 1993) (same fact pattern, denied IRS priority but allowed general unsecured claim), rev'd. No. 93-15985, 1994 WL 447271 (9th Cir. Aug. 19, 1994); IRS v. Century Boat Co. (In re Century Boat Co.). 986 F.2d 154, 156-57 (6th Cir. 1993) (Cardinal Mine does not save every priority claim); United States v. Vecchio. 147 B.R. 303 (E.D.N.Y. 1992) (held Cardinal Mine inapplicable where IRS given notice in time to file claim), rev'd. 20 F.3d 555 (2d Cir. 1994).
[Note: Section 213(b) of the Bankruptcy Reform Act of 1994 amends Code § 726(a)(1) to preserve the order of distribution for priority claims "tardily filed before the date on which the trustee commences distribution under this title."]
(ii) Of existence of claim
"In most cases, we anticipate that the government will not possess sufficient knowledge to assert a potential claim until completion of a post-award audit." In re Remington Rand Corp.. 836 F.2d at 833 n.7.
(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
A claim exists whether or not a proof of claim is filed. Filing is required only to permit creditor's participation in the case. Grynberg v. United States (In re Grynberg). 986 F.2d 367, 371 (10th Cir. 1993).
(1) Involuntary petitions [§ 303]
(2) Administration of estate -- creditors' committees. §§ 1102, 1103. However, under current law, government eligibility for committee membership is limited.
(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
Filing proof of claim waives sovereign immunity permitting bankruptcy court to decide counterclaims by estate against government. See § 106(b).
(2) Jury trial
Filing proof of claim waives right to jury trial on counterclaims. See Langenkamp v. Culp. 498 U.S. 42 (1990) (per curiam ).
(3) Nondischargeable claims
Some categories require creditor to take affirmative step of requesting that debt be excepted from discharge. See § 523(c)(1).
(4) Secured claims (including setoff)
Unavoided liens survive bankruptcy, see § 506(d)(2); In re Tarnow. 749 F.2d 464 (7th Cir. 1984), but circumstances may demand action by secured creditor to protect lien. See In re Newport Offshore, Ltd.. 78 B.R. 383 (Bankr. D.R.I. 1987) (denying setoff right).
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.
A bar order serves the important purpose of enabling the parties to a bankruptcy case to identify with reasonable promptness the identity of those making claims against the bankruptcy estate and the general amount of the claims, a necessary step in achieving the goal of successful reorganization. Thus, a bar order does not "function merely as a procedural gauntlet,". but as an integral part of the reorganization process.
First Fidelity Bank, N.A. v. Hooker Inves. Inc. (In re Hooker Inves.). 937 F.2d 833, 840 (2d Cir. 1991). The bar date is akin to a statute of limitations and must be strictly observed. In re Keene Corp.. 188 B.R. 903, 907 (Bankr. S.D.N.Y. 1995).
(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
"A failure to comply with the [Bankruptcy Codes's] claim filing requirements. is not necessarily the death knell for a misguided or inattentive creditor. The bankruptcy court may allow a Chapter 11 claim. when a disallowance of the claim will produce an unfair result through no fault of the creditor. Allowance of such a claim, upon the manifestation of
an intent to hold the estate liable on the debt, has come to be known as an informal proof of claim. The [informal proof of] claim must be in writing; there must be a demand by the creditor on the estate; it must evidence an intent to hold the debtor liable; the claim must be filed with the bankruptcy court; and allowance of the claim must be equitable under the facts of the case." Matter of Plunkett. 191 B.R. 768, 774 (Bankr. E.D. Wis. 1995); accord Clark v. Valley Fed. Savs. and Loan Ass'n (In re Reliance Equities, Inc.). 966 F.2d 1338, 1345 (10th Cir. 1992). Whether the writing must be filed with the court is subject to controversy. Compare In re County of Orange. 191 B.R. 1005, 1022 (Bankr. C.D. Cal. 1996) (Informal letter to the debtor/trustee was sufficient for informal proof of claim) and In re Dauer. 165 B.R. 146, 147 (Bankr. D.N.J. 1994) ("To constitute an informal proof of claim there must be a writing which makes a demand on the estate and/or expresses an intent to hold the estate liable for the debt.") with In re Cole. 189 B.R. 40, 51 (Bankr. S.D.N.Y. 1995) (An informal proof of claim requires a "timely written assertion or pleading," which "apprise[s] the court of the existence, nature, and amount of the claims. ") (emphasis added).
(c) Excusable neglect
Courts are permitted to accept late filings caused by inadvertence, mistake, or carelessness, not just by intervening circumstances beyond the party's control. FRBP 9006(b)(1); Pioneer Inv. Servs. Co. v. Brunswick Assocs. L.P.. 113 S. Ct. 1489 (1993). In making this equitable determination, courts should consider (1) the danger of prejudice to the debtor, (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay, including whether it was within the reasonable control of the movant, and (4) whether the movant acted in good faith. Id. at 1498; Agribank v. Green. 188 B.R. 982, 989 (C.D. Ill. 1995) (Intentional failure to file proof of claim timely so that its claim would be definitively stated and would not have to be amended is not 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 D avidovich. 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:
Chapter 7: Section 726(a)(3) permits payment of claims filed late but only after payment in full of timely filed general unsecured claims. Decisions allowing late claims in chapter 7 cases include In re Sea Air Shuttle Corp.. 168 B.R. 501 (Bankr. D.P.R. 1994); In re Brennan. 167 B.R. 316 (Bankr. D. Mass. 1993); In re Osman. 164 B.R.709 (Bankr. S.D. Ga. 1993); In re Brenner. 160 B.R. 302 (Bankr. E.D. Mich. 1993); In re McLaughlin. 157 B.R. 873 (Bankr. N.D. Iowa 1993); In re Rago. 149 B.R. 882 (Bankr. N.D. Ill. 1992); In re Corporacion de Servicios Medico-Hospitalarios de Fajardo, Inc.. 149 B.R. 746 (Bankr. D.P.R. 1993).
Chapter 13: Courts are split. Compare In re Hausladen. 146 B.R. 557 (Bankr. D. Minn. 1992) (Rule 3002 is inconsistent with the Code in that it requires disallowance of late-filed claims in chapter 13) with In re Duarte. 146 B.R. 958 (Bankr. W.D. Tex. 1992) (Rule 3002 bars late-filed claims unless one of the 6 exceptions is met or denial of due process can be demonstrated).
[Note: Section 213(a) of the Bankruptcy Reform Act of 1994 amends Code § 502(b) to disallow tardily filed claims except as provided in § 726(a)(1), (2), or (3) or the Bankruptcy Rules. The legislative history states that the amendment is designed to overrule Hausladen and its progeny. 103 Cong. Rec. H10768 (daily ed. Oct. 4, 1994).]
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).
To preclude possible inadvertent waiver of rights, DOJ recommends that any government proof of claim contain a statement to the following effect:
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).
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).