Earlier Motions Can't Save Late Bankruptcy Claim

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By Daniel Gill

July 25 — Motions to lift the automatic stay of proceedings imposed in a Chapter 7 case don't count as “informal proofs of claim” that would save an undersecured creditor's late-filed claim against the bankruptcy estate ( In re Noggle, 2016 BL 233210, Bankr. C.D. Ill., No. 15-90708, 7/20/16 ).

Chief Judge Mary P. Gorman of the U.S. Bankruptcy Court for the Central District of Illinois on July 20 sustained the Chapter 7 trustee's objection to the claim filed by Illini FS in the bankruptcy case of co-debtors Kevin and Michelle Noggle.

In so doing, the court noted that the Seventh Circuit, and bankruptcy courts within the circuit, disfavor the “informal proof of claim doctrine” and found that the creditor's three motions for relief from stay did not purport to assert a claim against the bankruptcy estate and therefore didn't function as a proof of claim.

In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors according to a priority scheme established in the Bankruptcy Code. In Chapter 7, creditors filing timely proofs of claim are paid before creditors tardily filing their claims.

Even though the debtor listed Illini FS, a division of GROWMARK, Inc., as a creditor in their official schedules filed with the court, the company failed to file a proof of claim after the court sent a notice to all creditors setting a bar date by which all claims must be filed.

The creditor filed a motion to have its claim deemed filed timely because it had filed motions for relief from the automatic stay prior to the expiration of the claims bar-date. The automatic stay is created by the filing of the bankruptcy case and halts all judicial proceedings against the debtor. A party must get court permission to lift the automatic stay in order to proceed with an action against the debtor or property of the debtor.

Here, the creditor filed its motions for relief from stay to get permission to pursue farm equipment and other collateral which secured the company's loans to the debtors. According to the debtor's schedules, they owed the company about $178,000, which debt was secured by equipment worth about $29,000. In bankruptcy, the creditor would hold a general unsecured claim for the amount of its debt less the value of its security.

The informal proof of claim doctrine “is an equitable doctrine developed by the courts to ameliorate the strict enforcement of the claims bar date,” the court said. But the Seventh Circuit, although it hasn't outright rejected the doctrine, “has not looked favorably on requests to approve such claims,” the court said.

The court decided that the doctrine failed in this case, because the relief from stay motions never asserted a claim against the bankruptcy estate, which is the purpose of filing a proof of claim. Instead, those motions “sought relief only as to the specific collateral described in each motion. None of the motions made a demand on the estate for the payment of Illini FS's claim,” the court explained.

Accordingly, the court denied the creditor's motion to have its claim deemed timely and sustained the trustee's objection to claim. The decision did not disallow the creditor's tardy claim.

The trustee Kristin Wilson, Charleston, Ill., appeared on her own behalf. The debtors were represented by Curtis A. Anderson, Danville, Ill.

Papers on behalf of Illini FS were filed by Mark A. Ludolph, Heyl, Royster, Voelker & Allen, Peoria, Ill.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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