THE PROCEDURES FOR TREATMENT OF CLAIMS IN CONSUMER BANKRUPTCY CASES

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1 THE PROCEDURES FOR TREATMENT OF CLAIMS IN CONSUMER BANKRUPTCY CASES Southern Bankruptcy Law Institute Atlanta, Georgia March 20 22, 2014 William E. Brewer, Jr. The Brewer Law Firm Raleigh, NC

2 I. INTRODUCTION The payment of claims in asset chapter 7 cases and chapter 13 cases are determined through the claims provisions set out in of the Bankruptcy Code (hereinafter the Code ), the chapter 7 distribution provision ( 726) and Bankruptcy Rules (hereinafter the Rules ), implementing these Code provisions. This manuscript examines several aspects of the claims process, including the time in which claims must be filed, the consequences of filing claims late, the time in which objections to claims must be made, the consequences of the failure to object to claims and the right of other parties to file claims for claimants who fail to file claims. II. FILING PROOFS OF CLAIM Timing is everything sometimes A. Relevant Bankruptcy Code Provisions and Bankruptcy Rules The Code provisions and the Rules relevant to the discussion of the issues are set out below. 11 U.S.C. 501(a) (c) and 11 U.S.C. 502(a) and (b)(9) provide as follows: 11 U.S.C. 501(a) (c): (a) A creditor or an indenture trustee may file a proof of claim. An equity security holder may file a proof of interest. (b) If a creditor does not timely file a proof of such creditor s claim, an entity that is liable to such creditor with the debtor, or that has secured such creditor, may file a proof of such claim. (c) If a creditor does not timely file a proof of such creditor s claim, the debtor or the trustee may file a proof of such claim. 11 U.S.C. 502(a) and (b)(9): (a) A claim of interest, proof of which is filed under 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a 2

3 general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects. (b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that 11 U.S.C. 726(a) provides as follows: (9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that 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, and except that in a case under chapter 13, a claim of a governmental unit for a tax with respect to a return filed under 1308 shall be timely if the claim is filed on or before the date that is 60 days after the date on which such return was filed as required. (a) Except as provided in 510 of this title, property of the estate shall be distributed (1) first, in payment of claims of the kind specified in, and in the order specified in, 507 of this title, proof of which is timely filed under 501 of this title or tardily filed on or before the earlier of (A) (B) the date that is 10 days after the mailing to creditors of the summary of the trustee s final report; or the date on which the trustee commences final distribution under this section; (2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is (A) timely filed under 501(a) of this title; (B) timely filed under 501(b) or 501(c) of this title; or (C) tardily filed under 501(a) of this title, if 3

4 (i) (ii) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under 501(a) of this title; and proof of such claim is filed in time to permit payment of such claim; (3) third, in payment of any allowed unsecured claim proof of which is tardily filed under 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C) of this subsection; (4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim; (5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and (6) sixth, to the debtor. Bankruptcy Rule 3002(a), (b), (c)(1)-(5) provide: (a) (b) (c) NECESSITY FOR FILING. An unsecured creditor or an 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 PLACE OF FILING. A proof of claim or interest shall be filed in accordance with Rule TIME FOR FILING. In a chapter 7 liquidation, chapter 12 family farmer's debt adjustment, or chapter 13 individual's debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under 341(a) of the Code, except as follows: (1) A proof of claim filed by a governmental unit, other than for a claim resulting from a tax return filed under 1308, is timely filed if it is filed not later than 180 days after the date of the order for relief. A proof of claim filed by a governmental unit for a claim resulting from a tax return filed under 1308 is timely filed if it is 4

5 Bankruptcy Rule 3004 provides as follows: filed no later than 180 days after the date of the order for relief or 60 days after the date of the filing of the tax return. The court may, for cause, enlarge the time for a governmental unit to file a proof of claim only upon motion of the governmental unit made before expiration of the period for filing a timely proof of claim. (2) In the interest of justice and if it will not unduly delay the administration of the case, the court may extend the time for filing a proof of claim by an infant or incompetent person or the representative of either. (3) An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed. (4) A claim arising from the rejection of an executory contract or unexpired lease of the debtor may be filed within such time as the court may direct. (5) If notice of insufficient assets to pay a dividend was given to creditors under Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall give at least 90 days notice by mail to creditors of that fact and of the date by which proofs of claim must be filed. If a creditor does not timely file a proof of claim under Rule 3002(c) or 3003(c), the debtor or trustee may file a proof of the claim within 30 days after the expiration of the time for filing claims prescribed by Rule 3002(c) or 3003(c), whichever is applicable. The clerk shall forthwith give notice of the filing to the creditor, the debtor and the trustee. Bankruptcy Rule 3005 provides as follows: (a) FILING OF CLAIM. If a creditor does not timely file a proof of claim under Rule 3002(c) or 3003(c), any entity that is or may be liable with the debtor to that creditor, or who has secured that creditor, may file a proof of the claim within 30 days after the expiration of the time for filing claims prescribed by Rule 3002(c) or Rule 3003(c) whichever is applicable. No distribution shall be made on the 5

6 claim except on satisfactory proof that the original debt will be diminished by the amount of distribution. Bankruptcy Rule 3007(a) and (b) provides as follows: (a) (b) OBJECTION TO CLAIMS. An objection to the allowance of a claim shall be in writing and filed. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing. DEMAND FOR RELIEF REQUIRING AN ADVERSARY PROCEEDING. A party in interest shall not include a demand for relief of a kind specified in Rule 7001 in an objection to the allowance of a claim, but may include the objection in an adversary proceeding. Bankruptcy Rule 9006(b)(1)-(3) provide as follows: (b) ENLARGEMENT. (1) In General. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect. (2) Enlargement Not Permitted. The court may not enlarge the time for taking action under Rules 1007(d), 2003(a) and (d), 7052, 9023, and (3) Enlargement Governed By Other Rules. The court may enlarge the time for taking action under Rules 1006(b)(2), 1017(e), 3002(c), 4003(b), 4004(a), 4007(c), 4008(a), 8002, and 9033, only to the extent and under the conditions stated in those rules. In addition, the court may enlarge the time to file the statement required under Rule 1007(b)(7), and to file schedules and statements in a small business case under 1116(3) of the Code, only to the extent and under the conditions stated in Rule 1007(c). 6

7 From these Code provisions and the Rules, the following basic rules emerge: B. Sixteen Basic Rules 1. A creditor must file a proof of claim to have an allowed claim unless a debtor, trustee or co-debtor files a claim on its behalf. [ 501; BR 3002(a); BR 3004; BR 3005]. 2. Though 501(a) provides that any creditor may file a proof of claim, BR 3002(a) only mandates that an unsecured creditor must file a proof of claim to have an allowed claim. There is controversy as to when a secured creditor must file a proof of claim to have an allowed claim [See discussion at pp ]. 3. Subject to Rule 5, a creditor, other than a governmental unit, must file its claim not later than ninety (90) days after the first date set for the 341 Creditors Meeting. [BR 3002(c)]. 4. Subject to Rules 5 and 6, a claim held by a governmental unit, must be filed within one hundred eighty (180) days of the filing of the bankruptcy. [ 501(b)(1); BR 3002(c)(1)]. 5. In a chapter 7 case in which notice of the meeting of creditors includes a statement that it is unnecessary to file claims pursuant to Bankruptcy Rule 2002(e), upon the determination that the case is an asset case, the clerk shall give at least ninety (90) days notice by mail to creditors of that fact and the date of which proofs of claim must be filed. [BR 3002(c)(5)]. 6. In chapter 13 cases, with respect to tax returns filed for any of the four (4) tax years immediately preceding the filing of the bankruptcy, the proof of claim must be within one hundred eighty (180) days of the filing of the bankruptcy or sixty (60) days following the filing of the tax return, whichever is later. [ 501(b)(9); BR 3002(c)(1)]. 7. The court may extend the time for filing of a claim by a governmental unit upon motion filed by the governmental unity before the expiration of the claims deadline. [ 501(b)(a); BR 3002(c)(1)]. 8. Under certain circumstances, the court may extend the time in which an infant or incompetent person may file a proof of claim. [BR 3002(c)(2)]. 9. In chapter 7, priority claims as specified in 507, will be paid as if timely filed if they are filed within ten (10) days after the mailing of the summary of the trustee s final report or by the date in which the trustee commences final distribution. [ 726(a)(1)]. 7

8 10. In chapter 7, tardily filed claims are allowable if the creditor did not have actual knowledge of the case in time to file a proof of claim, and the claim is filed in time to permit payment of the claim. [ 726(a)(2)]. 11. In chapter 7 claims, a tardily filed claim that is not allowable pursuant to Rule 10 is entitled to distribution, but only after all other claims have been paid in full. [ 726(a)(3)] 12. The debtor or trustee may file a proof of claim for a creditor who fails to timely file a proof of claim within thirty (30) days after expiration of the time in which the creditor could file a timely claim. [ 501(c); BR 3004]. 13. The time in which a debtor or trustee may file a claim for a creditor may be extended if: a. The request is made before the thirty (30) day deadline under Rule 3004 expires; or b. A motion after the time has expired if the failure to file the claim was the result of excusable neglect. [BR 3004; BR 9006(a)(1)]. 14. There is no provision in the Code or the Rules that authorizes a nongovernmental, competent or non-infant creditor to obtain an extension to file a proof of claim, before or after the running of the bar date. 15. There is no provision in the Code or the Rules that allow distribution to a creditor who fails to file a timely proof of claim. 16. Neither 502 nor Bankruptcy Rule 3007, which regulate the objection to claims, contains any provision setting a time limit in which a party must object to a claim. [See discussion at pp ]. C. The Relationship of the Code and the Rules The sixteen rules set out above are derived from both the Code provisions and the Rules. It is useful to recognize that the Rules adopted by the United States Supreme Court are authorized by 28 U.S.C which provides in pertinent part: The Supreme Court shall have the power to prescribe by general rules, the forms or process, writs, pleadings, and motions, and the practice and procedure in cases under title 11. 8

9 Such rules shall not abridge, enlarge, or modify any substantive right. 28 U.S.C (emphasis added). To the extent that a rule abridges, enlarges, or modifies any substantive right set out in the Code, it is invalid. In re: Suggs, 377 B.R. 198 (8th Cir.BAP 2007). The role of the Rules is to implement the provisions of the Code. For example, 501(a) provides for the filing of a claim, and 502(a)(9) provides for the disallowance of claims that are not timely filed. Except for the claims of a governmental unit, the Code does not specify what constitutes a timely filed claim. Bankruptcy Rule 3002(c) implements these Code provisions by specifying that a claim is timely filed if it is filed not later than ninety (90) days after the date first set for the Creditors Meeting. Should it so desire, the Supreme Court could reduce the time to file a claim to sixty (60) days. However, with respect to claims of governmental units, 502(b)(9) provides that the claim is timely filed if it is filed within one hundred eighty (180) days of the filing of the bankruptcy or such later time as the Federal Rules of Bankruptcy may provide. Bankruptcy Rule 3002(c)(1) implements 509(a)(9) s substantive provision for governmental unit claims with language that mirrors that provision. Bankruptcy Rule 3002(c)(1) also provides for the extension of time for filing governmental unit claims if the unit files the motion before the expiration of the deadline. The basis for the Rule allowing the extension is the authority given to the Supreme Court to provide a time later than one hundred eighty (180) days from the petition date to file the claim. Could the Rules be changed to provide for an extension based on a motion filed after the deadline? The answer would appear to be yes, as the authority granted in 509(a)(9) is that broad. Could the Rules be changed to reduce the time for filing a claim to less than one hundred eighty (180) days after the petition date? The answer is no. To do so, the Rule would abridge a substantive right in violation of 28 U.S.C The movement to adopt a 9

10 National Chapter 13 Plan is fueled, in part, by proposals to decrease the time in which creditors may file timely claims. Generally, the reduction may be achieved by amending the Bankruptcy Rules, but the 180-day bar date for governmental unit claims can t be reduced in the absence of Congress amending the Code. D. Consequences of a Tardily Filed Claim 1. Chapter 7 The treatment of tardily filed claims in chapter 7 are set out above in rules Priority creditors fare the best. They can receive their priority distribution as if they filed a timely claim so long as they file the claim prior to the date the trustee commences final distribution. The properly scheduled creditors and the creditors with actual knowledge of the bankruptcy fare worst. They receive distribution only after other claims are paid in full. These creditors benefit when the liquidation results in a 100% payment on claims. The most interesting situation arises when the creditor s failure to file the claim arises out of the debtor s failure to schedule the claim, and the creditor did not otherwise have actual knowledge of the case prior to the claim bar date. The creditor still has an allowable claim and will receive the distribution to which it is entitled if it files the claim in time to permit the payment. 11 U.S.C. 726(a)(2)(C). A related issue for the debtor and creditor with respect to an unscheduled claim is the discharge of the debt. Central to this analysis is 523(a)(3) of the Code which excepts from discharge unscheduled or unlisted debts under certain circumstances. That provision provides as follows: 523 Exceptions to discharge (a) A discharge does not discharge an individual from any debt 10

11 (3) neither listed nor scheduled under Section 521(1) of this title, with the name, if known to the debtor, or the creditor to whom such debt is owed, in time to permit (A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice of actual knowledge of the case in time for such timely filing; or (B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request; Section 523(a)(3) excepts from discharge debts that are not scheduled in time to permit timely filing of a proof of claim. Section 502(b)(9) provides that a tardily filed claim is an allowed claim so long as it is filed in time to permit distribution under 726(a)(1), (2), or (3). Since 726(a)(1) and (2)(C) eliminates any prejudice to unscheduled creditors who file claims prior to the distribution by the chapter 7 trustee. Are they still entitled to prevent the discharge of the debt pursuant to 523(a)(3)? The issue arises most often when the creditor belatedly learns about the bankruptcy prior to distribution, but fails to file the claim. The creditor s argument is that 523(a)(3) excepts the debt from discharge. It will contend that a tardily filed claim that entitles one to share in the distribution of funds from the estate based on the status of any claim is not the same as a timely filed proof of claim described in 523(a)(3). A description of the issue and the split of authority is succinctly outlined in this excerpt from In re Hurley, 2012 WL (Bankr. E.D.Wis. 2012) written by Judge Margaret McGarity. Subsection 523(a)(3)(A) of the Bankruptcy Code deals with unscheduled claims other than those specified in 523(a)(2), (4), or (6). An unscheduled claim is not discharged under subsection (A) if the creditor does not have notice or actual knowledge of the bankruptcy to permit timely filing of a proof of claim. See 11 U.S.C. 523(a)(3)(A) 11

12 Under 11 U.S.C. 502, a proof of claim may be disallowed if it is not timely filed. The time for filing proofs of claim is set forth in Fed. R. Bankr. P. 3002(b). In chapter 7 cases, however, unlike chapter 11, 12, and 13 cases, some untimely filed proofs of claim are allowed and can receive distributions from the estate. Section 502(b)(9) provides that an untimely claim should be disallowed except to the extent tardily filed as permitted under subsection (1), (2) or (3) of section 726(a). In chapter 7 cases, 726(a)(2)(C) allows payments to unsecured creditors who submit tardily filed proofs of claim if the creditor had no notice or actual knowledge of the bankruptcy case to permit a timely filing. The tardy claim must be filed in time to permit payment, i.e., before the distribution of the bankruptcy estate. 11 U.S.C. 726(a)(2)(C)(ii). These claims are allowed the same priority as timely filed claims. On its face, 523(a)(3)(A) addresses the right of a creditor to file a timely proof of claim but does not address tardily filed claims that share equally in the distribution of the chapter 7 estate under 726(a)(2)(C). Courts have interpreted the interplay between the two statutes differently. Some bankruptcy courts have held that a debt must be excepted from discharge under 523(a)(3)(A) even if the creditor had knowledge in time to file a tardy proof of claim and fully participate in the distribution under 726(a)(2)(C). See In re Schlueter, 391 B.R. 112 (B.A.P. 10th Cir.2008); In re Mai Yer Moua, 457 B.R. 755 (Bankr.D.Minn.2011); In re Bosse, 122 B.R. 410 (Bankr.C.D.Cal.1990). On the other hand, some courts have held that in chapter 7 cases, 523(a)(3)(A) must be read in conjunction with 726(a)(2)(C), in essence holding that this special category of tardily filed claims is the functional equivalent of a timely filed claim for the purpose of 523(a)(3)(A). See In re Romano, 59 Fed. Appx. 709 (6th Cir.2003); In re Reed, , 2009 WL (Bankr.N.D.Tex.2009); In re Ricks, 253 B.R. 734 (Bankr.M.D.La.2000); In re Kuhr, 132 B.R. 421, 424 (Bankr.E.D.Cal.1991). This latter group has been categorized as applying the distribution approach. The majority of the courts have adopted the distribution approach. The following excerpt from Hurley is representative of the rationale of those courts Courts holding a debt excepted from discharge when the creditor cannot file a timely claim are interpreting the word as it is used in Fed. R. Bankr. P ( a claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors... ). But timely is not a word of art, and courts applying the distribution approach are more persuasive. Webster's merely says that timely means in time. Merriam Webster Dictionary (11th ed.2008). In time for what? To collect from the estate. Certainly it was not meant to set a trap for debtors who do list and schedule a creditor but do not get an address right; the word must be applied to protect certain rights for the creditor, i.e., to collect from the estate. The plaintiff in this case received notice or actual knowledge of the bankruptcy in time to file a proof of claim and to collect from the estate, but it 12

13 chose not to do so. Applying the normal meaning of the word, the creditor did have notice or knowledge in time for timely filing a proof of claim. The creditor also had to meet the requirements of 726(a)(2)(C)(i) and (ii), which it did here, in order to be in the same priority as other creditors who received notice and met the bar date, but it still could have filed a timely proof of claim, as that term is used in 523(a)(3). 726(c)(2) may use different words to denote the special qualification for claims filed after the Rule 3002 bar date but before distribution, but this is a distinction without a difference. Both are in the same priority, timely and in time. Hurley, 2012 WL at 3. The important issue that arises with claims not being filed in chapter 7 cases relates to non-dischargeable debts, such as taxes, student loans, and domestic support obligations. The dark cloud for a debtor in an asset case is that some of his property is being liquidated. If he owes priority taxes or child support, the silver lining is that some of the funds generated from the liquidation will be applied to the payment of these nondischargeable debts. However, if the creditor does not file a claim, the lining evaporates. There are several actions the debtor s attorney can take to avoid this unfortunate situation: 1. Personally communicate with the creditors to encourage the timely filing of a proof of claim. 2. Most importantly, tickle the bar dates for the filing of proofs of claim, and file a claim for any unfiled, non-dischargeable claims as authorized by 501(c) within the 30 days allowed by BR When the trustee files his or her proposed distribution, make one final check on the claims filed. If priority tax or support claims have not been filed, immediately take action to encourage the creditors to file the claims. If necessary, file a response to the distribution to allow more time for the claims to be filed. This last 13

14 action is particularly available if the debtor can show excusable neglect in having failed to file the claim. 4. If the claim is a priority claim, file the claim for the creditor pursuant to BR Even though the claim will be tardy, 726(a)(1) provides for the distribution in the claim. See In re Nelson, 2012 WL (Bankr. N.D.Ill. 2012). 5. If the claim is a non-priority claim, such as a student loan, file a motion pursuant to BR 9006(b) to extend the time to file a claim pursuant to BR If granted, that will make the claim timely pursuant to 726(a)(2)(B). See In re Poor, 127 B.R. 78 (Bankr. M.D.La. 1991) (denying motion on failure to establish excusable neglect). For excusable neglect standard See Pioneer Inv. Service Co. v. Brunswick Associates, Ltd. Partnership, 507 U.S. 380, 113 S.Ct (1993). E. Claims Filed by Chapter 7 Trustees Section 501(c) and BR 3004 also permit a chapter 7 trustee to file claims on behalf of creditors. The circumstances in which trustees file claims are numerous, but the fact circumstances in which the validity and effect of trustee-filed claims appear to arise are cases in which the funds to be distributed from the bankruptcy estate exceeds the amount of claims. These cases arise most frequently when a case is originally designated and closed as a no-asset case, then re-opened later to administer newly discovered assets. The responses of the courts to trustee-filed claims are diverse. In re Nettles, 251 B.R. 899 (Bankr. M.D.Fla. 2000), the case was originally designated a no-asset case, and then noticed as an asset case to administer $78, the debtor received in settling an asbestos claim. The claims bar date was set for November 23, On February 8, 1999, the trustee filed six (6) unsecured claims totaling about $9, One of the six creditors filed its own claim for $6, The court 14

15 disallowed the claims, noting in a footnote that 726 does not provide for payment of claims tardily filed by a debtor or a trustee. The court further stated: it is clear that [Trustee] filed the claims in order to maximize his fee, not to protect the debtor. As such, [Trustee s] claims must be disallowed because their purpose is inconsistent with the objectives of 501(c). 251 B.R. at 902. In re Rothman, 373 B.R. 785 (S.D.Ga. 2006), also holds that a tardily filed claim by a trustee does not entitle the creditor to receive distribution pursuant to 726(a)(3). However, in In re Schmidt, 333 B.R. 868 (Bankr. N.D.Fla. 2005), the trustee filed the claims within the thirty (30) day time limit allowed by BR 3004 following the expiration of the creditor bar date. The debtor cited Nettles in objecting to the allowance of the claims. Judge Killian denied the objection, stating: I do not agree with the interpretation of 501(c) as set forth in Nettles. The statute clearly permits the Trustee to file a proof of claim on behalf of a creditor that failed to file one, and Rule 3004 sets the time limit. If the Trustee complies with that time limit, then there is nothing in either the Rules nor the Bankruptcy Code to support disallowance of the claim Furthermore, in Nettles, the Court found that the Trustee filed the claims in order to maximize his fee. The Debtor has presented no evidence of such a motive in this case. A desire on behalf of the Trustee to distribute available estate funds to creditors whose debts were listed and acknowledged by the Debtor in his filings, and would be discharged by the bankruptcy rather than returning those funds to the Debtor, is sufficient motivation for the Trustee to file claims on behalf of creditors who fail to do so. While the Trustee may not have an affirmative duty to file such proofs of claims, he likewise has no duty to refrain from doing so in order that the Debtor receive a windfall while receiving a discharge in bankruptcy. 333 B.R. at

16 2. Chapter 13 a. Unsecured Claims The same deadlines for filing claims in chapter 7 cases apply in chapter 13 cases but the consequences of the failure to timely file a claim are more severe. If an unsecured 1 creditor who is properly scheduled fails to timely file a proof of claim, the claim is to be disallowed pursuant to 502(b)(9) upon objection, and the creditor is not entitled to a distribution through the plan. If the creditor is properly scheduled, this consequence, though somewhat more severe than the consequences in a chapter 7, 2 seems just. Its exclusion from the distribution through the plan is its own fault. But, is the creditor who fails to timely file a proof of claim because it was not aware of the bankruptcy also excluded from the distributions under the plan? That hardly seems fair. The creditor s claim may be excepted from discharge, 3 but the right to pursue the claim after the chapter 13 plan is completed may be small consolation for being excluded from distributions under the plan. If a creditor who is not properly scheduled and who has no actual knowledge of the chapter 13 bankruptcy fails to timely file a proof of claim, the courts have reached different results in the consequences of the creditor. As set out in rule 15, neither the Code nor the Rules provide the creditor any relief from having its claim disallowed. 1 For treatment of unfiled or late filed secured claims, See pp , below. 2 The properly scheduled creditor in a chapter 7 case who files a claim shares in the distribution of funds only after all timely filed claims are paid in full. So, the consequences to the creditor filing a tardy claim will usually be the same in each chapter, no funds distributed to it. 3 Prior to BAPCPA, unscheduled claims were excepted from discharge pursuant to 1328(a) because such claims are not provided for. In re Plummber, 378 B.R. 569 (Bankr. C.D.Ill. 2007) BAPCPA added unscheduled claims to the list of exceptions to discharge in chapter 13 cases by incorporating 523(a)(3) into 1328(a)(C). 16

17 Sections 502(b)(9) and 726(a)(2)(C) provide relief to the chapter 7 creditor, but not to the chapter 13 creditor. BR 9006(b)(1) allows retroactive relief from some, but not all, deadlines when the failure of a party arises out of excusable neglect. Certainly the failure to file a claim when the creditor has no knowledge of the bankruptcy is excusable neglect, to the extent it is neglect at all. Unfortunately for the creditor, BR 9006(b)(1) and (3) explicitly deny an extension of time under BR 9006(b)(1) for meeting the deadlines imposed by BR 3002(c). They limit the extensions to those permitted under BR 3002(c), and BR 3002(c) provides limited relief with respect to the timely filing of claims, but to an infant, an incompetent person, and the government, but no relief to other creditors. A number of courts have strictly construed these provisions to prohibit late-filed proofs of claim under any circumstances. In re Jensen, 333 B.R. 906 (Bankr. M.D.Fla. 2005); In re Brogden, 274 B.R. 287 (Bankr. M.D.Tenn. 2001). Other courts have provided relief to the plight of these creditors. A thorough discussion of the rationale of the courts that do allow late-filed claims for unscheduled creditors in chapter 13 is contained in Judge Sacca s recent decision in the Northern District of Georgia. In re Adams, 502 B.R. 645 (Bankr. N.D.Ga. 2013). As set out in Adams, the courts have allowed the late-filed claims under three (3) bases: (1) the bar date is subject to judicial extension; (2) the Code and the bar dates in the Rules assume that the creditor has received notice of the bankruptcy case; and (3) creditors are entitled to due process and the government to fundamental fairness. 502 B.R. at The court in Adams allowed the late filing of an IRS claim. 17

18 A debtor often has a greater incentive than the creditor to create an allowable claim for the creditor. The reward for the creditor may be only pennies on the dollar, if any dividend at all. The reward for the debtor is converting a non-dischargeable claim into a dischargeable claim. So what does a debtor do when he discovers that he failed to schedule a creditor? How does he avoid having the debt excepted from discharge. Section 501(c) and Bankruptcy Rules 3004 and 9006(b) provide a potential solution. The debtor files a claim on behalf of the creditor pursuant to BR 3004 along with a motion pursuant to BR 9006(b) to allow the late filing of the claim for excusable neglect. If the debtor failed to schedule the claim because he did not know of its existence or has some other reasonable excuse for omitting the creditor, the motion will likely be granted. However, if the debtor was aware of the debt but simply failed to schedule it, then the court may deny the existence of excusable neglect and disallow the late filed claim. See In re Cox, 2010 WL (Bankr. M.D.Tenn. 2010) and In re Schuster, 428 B.R. 833 (Bankr. E.D.Wis. 2010). An excellent discussion of the right of a debtor to utilize BR 3004 and 9006(b)(1) to file a late claim for an omitted creditor is set out in the recent case of In re Sprague, 2013 WL (Bankr. D.Id. 2013). b. Secured Claims The status of the holder of a secured claim who fails to timely file a proof of claim is somewhat cloudy. The murkiness arises out of the wording of BR 3002(a) and (c). Even though 501(a) provides, in pertinent part, A creditor may file a proof of claim (emphasis added), BR 3002(a) provides An unsecured creditor must file a proof of claim for the claim to be allowed. (emphasis added). Then BR 3002(c) 18

19 then dictates the time in which claims must be filed in order to be timely without distinguishing between secured and unsecured claims. The omission of secured claims from BR 3002(a) is understandable in one sense. To the extent that a creditor has a lien on property of the estate, unless some particular action is taken by a debtor or trustee impacting the status of the lien, the lien passes through the bankruptcy unaffected. Dewsnup v. Timm, 502 U.S. 140, 112 S.Ct. 773 (1992); Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917 (1886). In a no-asset chapter 7 proceeding, no creditors, secured or unsecured, file claims. When assets are liquidated in an asset chapter 7, the status of liens will be dealt with in conjunction with the motion to sell property pursuant to Section 363. If the lien is avoidable pursuant to 522(f), 544, 545, 547 or 548, the avoidance will be accomplished through motion or adversary proceeding. The absence of the filing of a proof of claim by the holder of a fully secured claim is inconsequential. Furthermore, in many chapter 13 cases the absence of the secured creditor s proof of claim presents no problem. For example, in the case of a mortgage payment, which is not in arrears and which is to be paid directly by the debtor ( outside the plan ), the absence of the proof of claim is not an issue, since the chapter 13 trustee is to make no distributions to the creditor. However most frequently, the absence of the secured creditor s claim does create problems. A secured vehicle loan is being crammed down and paid through the plan. There are arrearages on a mortgage to be cured pursuant to 1322(b)(5). The plan provides for ongoing mortgage payments with the chapter 13 trustee serving as a conduit for the payments. What happens in any of these circumstances when there is no proof of 19

20 claim upon which the trustee can rely to make the distributions? The courts have struggled with this issue, and as one would suspect, come to different conclusions. An excellent place to get an overview of the issue is the recent opinion by Judge Cecilia Morris in In re Dumain, 492 B.R. 140 (Bankr. S.D.N.Y. 2013). In Dumain, the claims bar date was November 22, Bank of America filed its proof of claim for a secured claim on April 19, 2012, asserting a total claim of $357, and an arrearage claim of $4, The debtor had listed the debt to Bank of America on Schedule D. The debtor filed three plans on July 29, 2011; July 17, 2012; and September 27, The first provided for no arrearage; the second provided for an arrearage of $4,093.45; and the third provided for no arrearage. The debtor objected to the Bank of America proof of claim as being late-filed. Bank of America argued that secured creditors are not required to file a proof of claim pursuant to BR 3002(a), and that consequently the claims bar date imposed by BR 3002(c) did not apply to it. Judge Morris surveyed the status of the law and identified three (3) approaches to the issue. The first approach agreed with the position of Bank of America and held that the omission of secured creditors from BR 3002(a) relieved them from the bar date imposed by BR 3002(c). See In re Mehl, 2005 WL (Bankr. C.D.Ill. 2005). In Mehl, the court held that the creditor received no distributions unless or until it files a proof of claim, but that there was no deadline in which to file the claim. The second approach recognizes the existence of a bar date, but not the bar date imposed by BR 3002(c). An example of the second approach is found in In re Macias, 195 B.R. 659 (Bankr. W.D.Tex. 1996). Macias reviewed the legislative history related to claims bar dates, noting that prior to 1994, the Code contained no provision providing for 20

21 the disallowance of claims due to timeliness. The case of In re Hausladen, 146 B.R. 557 (Bankr. D.Minn. 1992) (en banc), held that claims in a chapter 13 case were not to be disallowed due to their timeliness, but rather were treated as provided for in the plan. Congress superseded Hausladen by adding 502(b)(9) to the Code. Macias reasoned that since 502(b)(9) makes no distinction between secured and unsecured claims, there needs to be some bar date for secured claims. The court in Macias adopted the BR 3002(c) bar date on the secured creditor, not because it explicitly applied, but as a matter of policy to implement 502(b)(9). The third approach appears to be the majority approach and the one adopted by the court in Dumain. These courts apply the bar date of BR 3002(c) to secured creditors. Another opinion adopting this approach is In re Dennis, 230 B.R. 244 (Bankr. D.N.J. 1999). That court reasoned that the omission of secured creditors from BR 3002(a) was just a manifestation of the principle that secured creditors can ignore the bankruptcy process and loot to its lien for satisfaction of its debt. However, if the secured creditor desires to participate in the process, it must do so through the claims process, and that 502(b)(9) dictates that it must file a timely claim to have an allowable claim. BR 3002(c) implements this provision by defining a timely claim. 4 III. OBJECTION TO CLAIMS A. Time Which to Object Section 502 provides for objections to claims, but BR 3007 implementing this provision provides no time constraint in which the objection must be made. The reason lies partially in the fact that the claims are deemed allowed if not objected to. Therefore, the natural process of the 4 In the opinion of the author of this manuscript, this third approach is the correct one, especially in light of the supremacy of the Bankruptcy Code over the Bankruptcy Rules. 21

22 case will dictate the timing of the objection. In a chapter 7 case if a trustee, debtor or other interested party wants to object to the allowance of a claim, that party will need to do so before the distribution is made to the holder of the claim. However, in chapter 13 cases, with distributions or claims taking place on a recurring basis under the confirmed plan, the time in which the objection is timely is not so clear. Many courts have held that the date by which the plan is confirmed creates the bar date for objecting to claims. See In re Starling, 251 B.R. 908 (Bankr. S.D.Fla 2000). See also In re Clark, 172 B.R. 701 (Bankr. S.D.Ga. 1994). However, the case of In re Shank, 315 B.R. 799 (Bankr. N.D.Ga. 2004) held that the confirmation of a plan does not create a bar to the subsequent objections to claims. The court based its decision on several factors, including the fact that neither the Code nor the Rules imposed such a bar date and the fact that many chapter 13 plans are confirmed prior to the bar date for filing claims. Even those courts that do allow objections to claims after confirmation will apply the doctrine of laches or other equitable remedies from permitting a delayed objection to a claim from improperly prejudicing the holder of a claim. In re Shook, 278 B.R. 815 (9 th Cir. BAP 2002). IV. CLAIMS PROCESS VERSUS CONFIRMATION PROCESS Intertwined in the claims issues discussed herein is the impact of the confirmation of a chapter 13 plan on the allowance and treatment of claims. Plans are confirmed that provide for claims for which no proof of claim has been filed. Plans are confirmed that provide for claims which are subsequently objected to. Plans are confirmed that provide for claims in an amount or in a manner inconsistent with the proof of claim. Which process has priority over the other? The proof of claim filed by the creditor is prima facie evidence of the validity and amount of the claim. BR 3001(f). If the debtor objects to the allowance of the claim, he is to object to the claim in writing. BR At the same time, 1327 provides the provision of a confirmed 22

23 plan binds the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan. Do we have the irresistible force attacking the immovable object? To further explore this issue, consider the common issue of the valuation of the motor vehicle for determining the amount of the bifurcated secured/unsecured claims on a motor vehicle loan. The debtor, the creditor, and sometimes, the trustee play a role. There may be too many cooks spoiling the valuation broth. The debtor sets forth a value in his proposed plan. The creditor files a proof of claim, setting forth the value. The claim may be filed either before or after the confirmation of a plan, depending on how quickly confirmation occurs. In some districts, the trustee may file a motion for confirmation of plan setting forth a value different from the value asserted by either the debtor and the creditor. So when a plan is confirmed with a value lower than the value asserted by the creditor in its presumptive value, unobjected to claim, who prevails? The courts have generally, but not unanimously, given the confirmation process the upper hand in this conflict. The key component generally comes down to the notice provided to creditors that its collateral is being valued through the confirmation of the plan. A leading case on this is In re Hudson, 260 B.R. 421 (Bankr. W.D.Mich. 2001). The court disposed of the argument related to the presumptive validity of the proof of claim by holding that the claim allowance process gives prima facie proof only as to the amount of the creditor s initial unbifurcated claim, but does not establish the value of the collateral. The Bankruptcy Court for the Northern District of Georgia in In re Chambers, 2008 WL (Bankr. N.D.Ga. 2008) held that the confirmed plan in that case did not effectively bifurcate the claim, but appeared to be open to the possibility where proper notice is provided to the creditor. The court stated: A review of the case law and applicable statutes demonstrates that without such an objection, the entire claim amount is deemed enforceable as secured if so 23

24 stated in the claim. The question here is whether to value it as secured, partially secured, or unsecured. While the claims objection process may not be the only way to establish this status, the Court finds that an objection is needed in the present case. This conclusion follows because whether or not a debtor can accomplish bifurcation of a claim through a plan that clearly set forth such intent in compliance with Section 506(a) and Bankruptcy Rule 3012, the process effected here through Debtors plan and motion to avoid lien does not produce this result as it did not provide for sufficient notice. (citations omitted). Similarly, the court in In re Sernaque, 311 B.R. 632 (Bankr. S.D.Fla. 2004) held that a wholly unsecured junior mortgage could be stripped through the confirmation process, as long as notice was properly provided to the mortgagee. 5 See however, In re Shank, 315 B.R. 799 (Bankr. N.D.Ga. 2004). The Eleventh Circuit Court of Appeals dealt with the issue of the payment of a mortgage arrearage through the chapter 13 in In re Bateman, 331 F.3d 821 (11th Cir. 2003). The battle lines were drawn as follows: Debtor proposed to cure a mortgage arrearage of $21, in its plan, and the plan was confirmed on March 14, 1997 providing to cure that amount. Prior to that date, the mortgage creditor had timely-filed a proof of claim for an arrearage of $49, The debtor did not object to the claim. These ships circled each other in the night until the chapter 13 trustee noted the discrepancy. The debtor filed an objection to the claim. The mortgage company filed a motion to dismiss. The bankruptcy court sustained the debtor s objection and denied the motion to dismiss. The district court affirmed. The Eleventh Circuit split the baby, with the mortgage company receiving the greater portion. The Court held that the claims process controlled on the amount of the arrearage claim and that the mortgage company, Universal, was 5 The Supreme Court s holding in United States Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct (2010) lends support to valuing collateral through the confirmation process. If the notice provided to a student loan creditor in a plan of confirmation that the debtor proposed to discharge the debt as an undue hardship meets due process standards certainly notice to a secured creditor of the bifurcation of its claim does too. 24

25 owed $49, However, it held that the plan controlled with respect to the treatment of the allowed claim, i.e. paying $21, of the $49, arrearage. The refusal of the bankruptcy court to dismiss the case for the debtor s failure to pay the arrears in full was proper. The Court states:.. [A]lthough the parties are bound by the terms of the plan, as confirmed, Universal s secured claim for arrearages survives the plan and it retains its rights under the mortgage until Universal s claim is satisfied in full. 331 F.3d at