Filing a successful proof of claim is the key to unlocking a creditor's right to recover against a debtor in bankruptcy. Only in limited circumstances may a creditor recover against the debtor's estate without properly filing a proof of claim. This article addresses the various stages of filing, attacking and defending a proof of claim.
A proof of claim is "a written statement setting forth a creditor's claim." To aid creditors, the judiciary has created an "Official Form" for filing proofs of claim that comply with the Bankruptcy Code and Rules. The deadline for filing proofs of claim is fixed by the Bankruptcy Court.
The proof of claim serves to give notice to the Bankruptcy Court, the debtor-in-possession/trustee, and other interested parties of the creditor's claim. Beyond alerting others to the existence of the claim, it also begins the process of establishing the amount of the claim, by requiring the creditor to specify the amount owed as of the petition date. Finally, the proof of claim identifies the type of claim, such as whether it is a secured or unsecured claim, and any priority asserted by the creditor. The proof of claim is therefore more than just a "written statement" of the creditor's claim, but also the opening salvo in the creditor's attempt to obtain a distribution from the debtor's estate which must be completed with care.
The Official Form requires a claimant to describe its claim as an unsecured or secured priority claim. Claims receive different treatment under the Bankruptcy Code, depending upon the priority, and accordingly, this required designation is more than a technicality. A secured claimant who has perfected a security interest in a particular piece of collateral is entitled to receive a distribution from that specific property before any other creditors can recover from that specific property. If the claim is unsecured, the Bankruptcy Code establishes a schedule of "priorities" giving the order in which unsecured claimants are paid back, based on the type of claim, until the debtor's estate is exhausted. As a few examples, priority unsecured claims (in order) include domestic support obligations; wages, salaries and commissions; consumer deposits; and other unsecured claims.
More basic requirements for filing a proof of claim include a signature by the creditor or its authorized agent. Further, if the claim is based on a written document, the creditor should file a copy of the document; or if the document is no longer available, the creditor should explain how it came to be lost or destroyed. If the creditor possesses a security interest in the debtor's property, the creditor should include evidence of the security interest's perfection.
While the ultimate burden of persuading the Bankruptcy Court that the claim is valid always rests with the claimant, once a creditor files a proof of claim complying with these rules, the proof of claim becomes "prima facie evidence of the validity and amount of the claim." If left unchallenged, the creditor will be entitled to receive distributions from the debtor's estate in order to satisfy its claim. As courts have recognized, this effectively shifts the burden to objectors to present evidence casting doubt on the claim, with such evidence carrying at least equal evidentiary force as the details in the proof of claim. However, the objector having done so, the burden returns to the claimant to demonstrate the ultimate validity of its claim.
The Bankruptcy Code and Rules allow for a "party in interest" to object to the proof of claim. Such objections must be written and filed with the Bankruptcy Court. The objector must also serve a copy on the claimant at least 30 days before the hearing on the objection. The objector should also make it clear that this is an objection to a proof of claim filed in the case and specify which proof of claim is affected.
One typical tactic that objectors employ is the so-called "omnibus objection," resulting from the fact that many claims are vulnerable to objections on the same basis. As a consequence, objectors will often set forth a general legal basis for a reduction or elimination of particular claims, and then attach as an exhibit a list of claims to which the objection applies. For example, claims that were filed late-that is, they were filed after the claims filing deadline, are often the subject of a so-called "omnibus objection."
Before 2007, this type of objection posed additional challenges to claimants. It was often difficult for claimants to know whether they had been named in the objection because the Bankruptcy Rules did not require objectors to list claims in alphabetical or numerical order, meaning that a creditor could easily miss that its proof of claim was being challenged among the hundreds or even thousands of claims named in just a single omnibus objection. This required a careful inspection of the attached exhibit to determine if its claim was affected.
Seeing the need to impose limits on such unwieldy objections, the judiciary amended the Bankruptcy Rules to make omnibus objections more accessible to creditors. First, the amended Bankruptcy Rules allow omnibus objections only on limited grounds, including duplication, claims that were filed in the wrong case, amended claims, late claims and other procedural objections.
Other than circumscribing when an objector can employ an omnibus objection, the Bankruptcy Rules now also detail how the objection can be made, with the ultimate goal of making it easier for creditors to determine whether one of their claims has been named. The omnibus objection must list claimants alphabetically (and additionally list them by category of claims if appropriate) and provide a cross-reference to claim numbers. For each claim, the objector must state the grounds of the objection and cross-reference the pages in the omnibus objection pertinent to the stated grounds.
An omnibus objection must also explain, "in a conspicuous place," that claimants receiving a copy of the objection should find their names and claims therein. These rules prohibit objectors from naming more than 100 claims per omnibus objection. Finally, the title of the objection must state the objector's identity and its ground for objection and be numbered consecutively with the objector's other omnibus objections.
After an objection is filed, the creditor is required to submit a written response. If a timely response is filed, the Bankruptcy Court will conduct an evidentiary hearing to establish the validity of the claim, along with its amount as of the petition date. Often, the hearing is scheduled at the time the objection is filed; however, depending upon the size and nature of the claim, the court may establish a discovery schedule prior to the hearing. The court will generally look to non-bankruptcy law to determine whether to allow the claim.
The proofs of claim process demonstrates how important it is that the respective parties get their roles right. Creditors must be diligent in properly filing a proof of claim to recover from the debtor's estate and in carefully filling out the Official Form to ensure that their claims are properly characterized and quantified. A party in interest must make a cogent objection to the proof of claim sufficient to overcome its presumption of validity and take heed of recent changes to the rules governing omnibus objections.