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Filing Proofs of Claim in Bankruptcy Court: May One be Fashionably Late? It Depends.

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Kentucky, Ohio)

Effective December 1, 2017, the deadline for filing a proof of claim in Chapter 13 cases was shortened to 70 days after a petition is filed or a case is converted to Chapter 13. This deadline is significantly earlier than under the previous rule, which set a deadline of 90 days after the first meeting of creditors. For the most part, the industry has once again risen to the challenge and proofs of claim are being timely filed. However, for reasons ranging from lack of notice about a bankruptcy filing to a servicing transfer (or simply dropping the ball), what happens if a proof of claim (POC) is late? Read on.

Not Enough Notice?
If a creditor receives insufficient notice, additional changes to the bankruptcy rules that began on December 1, 2017 allow creditors to seek permission to file a late proof of claim by motion. Prior to December 1, 2017, Bankruptcy Rule 3002(c)(6) allowed a creditor to move the court for an extension of time to file a POC by up to 60 days — but only if the notice of bankruptcy was mailed to the creditor at a foreign address in Chapter 7 cases. Incredibly, bankruptcy courts were split on whether a creditor who received no notice in a Chapter 13 case should be entitled to file a late POC, notwithstanding the provisions of Bankruptcy Rules 3002(c). Some courts found that its discretion to enlarge the time for filing a proof of claim in a Chapter 13 case is limited to the specific “foreign address” exception and would not allow a late-filed claim for any other reason. See, e.g., In re Lovo, 584 B.R. 79 (Bankr. S.D. Fla. Mar. 27, 2018).

In December 2017, as explained by the Committee Notes to the rules, the rules were amended to expand the exception to the bar date for cases in which a creditor received insufficient notice of the time to file a proof of claim. The amendment provides that the court may extend the time to file a POC if the debtor fails to file a timely list of names and addresses of creditors. The amendment also clarifies that if a court grants a creditor’s motion under the rule to extend the time to file a POC, the extension runs from the date of the court’s decision on the motion.

Accordingly, if a claims bar deadline is missed, the first thing a creditor should review is whether the debtor failed to file the list of creditors’ names and addresses with the petition, which is required in order to be timely. Although the court still has discretion to extend the time for filing a proof of claim for a creditor who received notice at a “foreign address,” the Committee Notes for prior rule amendments reveal that the “foreign address” exception is designed to provide notice to foreign creditors of a case filed under Chapter 15 of the Bankruptcy Code.

Just Go Ahead and File the POC?
Even where a debtor timely lists the names and addresses of creditors, a proof of claim might not be filed in time. Many jurisdictions are allowing Chapter 13 trustees to adopt a “business as usual” approach of scheduling late-filed claims where the plan provides for cure of the arrearage. Some trustees insist that the plan arrearage figure controls, and creditors are filing the POC to match exactly what is listed in the plan to avoid objections.

Other trustees schedule the arrearage claim provided for in the proof of claim in full. These trustees are taking a practical attitude toward the situation and making every effort to pay on a claim that both the debtor and creditor want paid, and creating an environment where a debtor will in fact receive a fresh start if the plan concludes.

Several trustees are taking an extra step of filing a notice of intent to pay a claim filed over 70 days into a case. The following excerpt from such a notice shows the rationale and practicality of this:


Fed. R. Bankr. P. 3002(a) provides as follows:
(a) Necessity of Filing. A secured creditor, unsecured creditor, or equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005. A lien that secures a claim against a debtor is not void due only to the failure of any entity to file a proof of claim.


Fed. R. Bankr. P. 3002(c) provides for the filing of a proof of claim 70 days after the order for relief.


11 U.S.C. Section 502(a) provides that a claim is deemed allowed unless a party in interest objects.


11 U.S.C. Section 704(a)(5) provides that if a purpose would be served, [Trustee shall] examine proofs of claim and object to the allowance of any claim that is improper.


Creditor filed a claim after its due date.


The Trustee does not believe a purpose would be served by objecting to the claim.
In the future – Creditor should file its claim by the 70-day deadline of Fed. R. Bankr. P. 3002(a).


Trustee will pay this claim unless an objection is filed by Debtor(s)’ Counsel or other creditor within 21 days.

 

It is important to recognize, even in situations where a trustee subscribes to a practice of scheduling a late proof of claim, that a bankruptcy court may still disallow the claim — even where an objection has not been filed. See, e.g., In re Benner, Case No. 15-31477 HCD (Bankr. N.D. Ind., Jul. 18, 2018) (claim filed one day after the claims bar deadline disallowed as “[a] provision for payment to a secured creditor in a confirmed plan does not obviate the requirement for that secured creditor to have an allowed claim”). Note, however, that the July 18, 2018 order in Benner was vacated on September 4, 2018 upon consideration of motions for reconsideration filed by the Chapter 13 trustee and the creditor; and the late-filed claim was allowed.


Encourage the Debtor or Trustee to File POC; Amend Later?
If a creditor does not file a timely proof of claim, a debtor (or trustee) is permitted to file a POC on the creditor’s behalf for an additional 30 days. See Fed. R. Bankr. P. 3004. As such, there may be an opportunity for the debtor or trustee to file a proof of claim, only to have the creditor amend it later. Be mindful that some courts have held that if one waits too long, the right to amend is lost. See In re Lee, Case No. 16-30416 (Bankr. N.D. Ohio, May 8, 2018).

In Lee, the creditor did not file a POC by the bar date, and the debtors filed one on its behalf. Fourteen months later, the creditor filed an amended proof of claim. The court pointed out that neither the Bankruptcy Code nor Rules specifically address whether a creditor can amend a claim filed on its behalf by a debtor pursuant to Rule 3004. The Advisory Committee Notes to Rule 3004 explain: “Since the debtor and trustee cannot file a proof of claim until after the creditor’s time to file has expired, the rule no longer permits the creditor to file a proof of claim that will supersede the claim filed by the debtor or trustee. The rule leaves to the courts the issue of whether to permit subsequent amendment of such proof of claim.”

A majority of courts have held that they have the discretion to allow a creditor to amend a claim that a debtor has filed on the creditor’s behalf. However, the Lee court criticized the creditor’s 14-month delay in amending the claim: “this court will not reward Creditor’s dilatory method of proceeding in this Chapter 13 bankruptcy case by allowing it to now amend the proof of claim filed by Debtors. Moreover … the exercise of the court’s discretion is further limited by the preclusive effect of Debtors’ confirmed plan ….”

Some Trustees want the Judge to Decide
Certain trustees are taking a hard stance on the bar date by opposing motions for late claims and objecting to claims. One such trustee recently wrote to this author: “So I really don’t see what you can suggest that will change our minds. I think this was the whole point of the rule change so the mortgage industry would tighten it up and debtor’s counsel has to be on the ball to file claims if the secured creditor does not. In this case the only solution I have is for debtor to voluntarily dismiss and then refile.”

In situations where creditors must convince the court to allow the late claim, many of the same arguments offered prior to the December 2017 amendments will be made, such as the “informal proof of claim” doctrine and the existence of “excusable neglect” for missing the daunting deadline. Hopefully, the bankruptcy judge will be persuaded by the fact that disallowance of a late claim is the least likely path for a debtor to obtain a fresh start in bankruptcy.

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Note for consideration of the USFN Award of Excellence: This article is a "Feature."

 

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