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Sept. 17 — Missing the deadline to file a claim in a bankruptcy case can cost a creditor, but the ramifications depend on what circuit the case is in.
Judge Terrence L. Michael refused to recognize a dischargeability suit the creditors had filed as an “informal proof of claim” after they failed to file a timely formal proof of claim. What exactly counts as an informal proof of claim varies widely between courts, and unfortunately for the creditors in this case, the Tenth Circuit appears to have a higher hurdle than some other circuits.
When a debtor files for bankruptcy, creditors must file a proof of claim if they hope to collect on their debt from the bankruptcy estate. This claim must be filed by a certain deadline established by the court.
In this case, it was uncontested that creditors Michele and William Ingram missed the deadline. The Ingrams had a judgment against the debtor in excess of $80,000. After the bankruptcy filing, the Ingrams sued to have the debtor denied a discharge or at least have their debt declared nondischargeable, alleging that the debtor had engaged in fraud. But despite filing the suit, the Ingrams never actually filed a formal proof of claim.
The Ingrams argued that they should be able to file a late proof of claim and have it deemed timely. Their main argument was that the suit they filed, which was filed before the claims deadline, should be considered an informal proof of claim. If their claim was deemed timely filed, they'd get substantially more money from the bankruptcy estate. But late filed claims go to the back of the line, and only get paid after the other timely claims have been paid.
Courts have recognized that other documents can qualify as an informal proof of claim if they contain essentially the same information as a formal proof of claim. But as the Oklahoma court noted, the requirements aren't consistent among the courts.
A recent case from the First Circuit's bankruptcy appellate panel found that an objection filed by a creditor qualified as an informal proof of claim, but the court acknowledged that the criteria for an informal proof of claim in the First Circuit is hazy. Courts in the Eleventh Circuit have recognized that a dischargeability suit can qualify as an informal proof of claim, but the Eleventh Circuit has a more lenient standard than the one the court applied in this case, according to research conducted by Bloomberg BNA.
In this case, the court relied on the criteria set forth in In re Reliance Equities, Inc., 966 F.2d 1338 (10th Cir. 1992), which held that an informal proof of claim requires: “(1) the proof of claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor's estate; (3) the writing must express an intent to hold the debtor liable for the debt; (4) the proof of claim must be filed with the Bankruptcy Court; and (5) based on the facts of the case, it would be equitable to allow the amendment.”
The court said in a footnote that the last four factors may have been dicta in the Reliance case, meaning they wouldn't be binding precedent on lower courts in the circuit. But the court adopted this test anyway, noting that it's “well-reasoned and generally accepted.”
While the Ingrams' dischargeability suit met some of these requirements, the court said that it didn't say anything about holding the debtor's estate liable. The court said that whether or not the claim is nondischargeable is “totally unrelated to the claims allowance process” because “[p]ayment of claims and discharge of debts are two separate and distinct aspects of bankruptcy law.” The court added that in a Chapter 7 bankruptcy case, “the estate and the debtor are two separate and distinct entities” and “[a] claim against one is not a claim against the other.”
The more lenient Eleventh Circuit only requires that an informal proof of claim “apprise[s] the court of the existence, nature and amount of the claim (if ascertainable) and make[s] clear the claimant's intention to hold the debtor liable for the claim.” It doesn't require that the creditor make clear he intends to hold the estate liable. But unfortunately for the Ingrams, their case wasn't in the Eleventh Circuit.
The Ingrams argued that a demand on the estate is implied in their suit, but the court said it would be a “bad idea” to force bankruptcy trustees to “divine the intent of a creditor to hold a bankruptcy estate liable” from documents other than a formal proof of claim, which could lead to “uncertainty and conjecture.”
Finally, the court found that the equities weren't in the Ingrams favor.
“There is no dispute that both the Ingrams and their counsel were given proper notice of and were aware of the claims bar date,” the court said. “As noted in Reliance, ‘the equities do not favor protecting a [creditor] that had numerous opportunities to protect itself.'”
The debtor was represented by Chad J. Kutmas of McDonald, McCann & Metcalf, LLP, Tulsa, Okla., and Timothy P. Studebaker of Studebaker & Worley, PLLC, Tulsa, Okla.
The Ingrams were represented by Ryan T. Scharnell of Conner & Winters, LLP, Tulsa, Okla.
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