The Ninth Circuit’s Bankruptcy Appellate Panel (BAP) recently upheld the disallowance of a credit union’s claims after the credit union’s “disgruntled employee” failed to file the proofs of claim before the claims bar date.
The case of Spokane Law Enforcement Federal Credit Union v. Barker (In re Barker) serves as a cautionary tale—reminding creditors and their attorneys of the importance of timely filing proofs of claim.
Whether a late-filed claim will be paid depends, in part, on what chapter of the Bankruptcy Code the case was filed under.
In chapter 11 cases, a claim listed on the debtor’s schedules is deemed allowed in the amount listed on the schedules, unless it is identified as disputed, contingent or unliquidated. This is not the rule for chapter 7 and 13 cases, where a creditor must affirmatively file a proof of claim before the bar date (usually 90 days after the first set date for the meeting of creditors). Additionally, a creditor of a chapter 11 debtor must timely file a proof of claim if it disagrees with the amount of the claim as scheduled by the debtor.
Recourse for Late-Filed Claims
If a creditor misses the claims bar date, it may argue that its claim should nonetheless be allowed under the Bankruptcy Rules.
In chapter 11 cases, a bankruptcy court may enlarge the time to file a proof of claim, even after the bar date has passed, if the failure to file the proof of claim “was the result of excusable neglect.”
In chapter 7 and 13 cases, however, the deadline to file a proof of claim can only be extended in one of the six circumstances set forth in Bankruptcy Rule 3002(c). These include extensions of time for governmental units, infants and incompetent persons and creditors receiving notice at a foreign address. Additionally, the rule provides that the court may direct a different bar date for claims arising from the rejection of an executory contract or unexpired lease of the debtor.
In chapter 7 cases, late-filed claims are not disallowed, but are subordinated to timely-filed claims. Since chapter 7 liquidations rarely result in an 100% dividend to timely-filed unsecured creditors, most late-filed claims in chapter 7 are not paid.
Understanding the different proof of claim rules applicable to various chapters of the Bankruptcy Code is critical.
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Scheduled Debt is Not an Informal Proof of Claim, BAP Holds
The Barker case was filed under chapter 13 of the Bankruptcy Code, which provides the least recourse for late-filed claims. Although the debtor scheduled the credit union’s claims, the credit union was nonetheless required to timely file proofs of claim in order to have allowed claims in the case. The fact that its disgruntled employee failed to file the proof of claim before the bar date was of no import because the excusable neglect standard for enlarging the time to file claims does not apply to chapter 13 cases and the credit union’s circumstances did not fit within the limited exceptions set forth in Bankruptcy Rule 3002(c).
The credit union argued that the “informal proof of claim doctrine” should apply to allow its late proofs of claim because the debtor scheduled the credit union’s claims. Under this doctrine, a late-filed proof of claim is allowed when it relates back to a timely informal proof of claim – a written document by the creditor that brings to the court’s attention the nature and the amount of the creditor’s claim. The BAP held that the debtor’s schedules alone could not constitute an informal proof of claim because the informal proof of claim must be raised by the creditor (not the debtor). The BAP cited to several cases, including a Fourth Circuit case, finding informal proofs of claim where the debtor scheduled the claim plus the creditor provided other evidence of its timely pursuit of the claim such as letters to the trustee asserting the claim.
Although there are options available to creditors who file late proofs of claims, it is never ideal to be arguing that a claim should be allowed under an “excusable neglect” or “informal proof of claim” theory. Creditors and their attorneys should closely monitor claims bar dates to ensure that their proofs of claim are filed on time.