6 THINGS TO REMEMBER ABOUT PROOFS OF CLAIMS IN INDIANA BANKRUPTCY COURTS

Although my blog primarily is devoted to issues surrounding Indiana state court foreclosure and lien enforcement actions, some discussion of bankruptcy matters will be warranted.  This is because, not infrequently, a real estate foreclosure or UCC lien enforcement proceeding that starts in state court will end up in bankruptcy court.  So, I would be remiss if, from time to time, I did not address legal opinions arising out of Indiana bankruptcy courts.  One such case is In The Matter Of:  David Burr Fink, 2007 Bankr. LEXIS 1149 (N.D. Ind. 2007), a March 15, 2007 decision by Judge Robert E. Grant that tackles questions regarding whether a late-filed proof of claim should be allowed.  (Fink Opinion.pdf)

1. General bankruptcy rule.  An unsecured creditor that has notice or knowledge of a bankruptcy case but fails to timely file a proof of claim may have its claim disallowed or, in a Chapter 7 liquidation case, subordinated (see #3). 11 U.S.C. 502(b)(9); Fink at 2.

2. “Excusable neglect” exception.  In a chapter 11 proceeding only, a court can, but is not required to, allow late filed claims if the failure is due to excusable neglect.  Bankr. Rule 3003(c) and 9006(b)(1); Fink at 2, n.1. Proving “excusable neglect” can  be difficult, particularly where a creditor is sophisticated and/or represented by counsel.

3. Chapter 7 late claims.  In Chapter 7 cases, theoretically the failure to file a timely proof of claim is not fatal.  11 U.S.C. 726(a)(3); Fink at 2.  The result is the subordination of the claim to the full payment of all other timely filed unsecured claims. Thus the tardy creditor is at the back of the line for any distribution.  11 U.S.C. 726(a)(3); Fink  at 14. But chapter 7 plans that pay unsecured creditors in full are extremely rare.  For all practical purposes, a late-filed claim in a Chapter 7 case ultimately will mean no distribution to an unsecured creditor.

4. “No asset” cases.  In most Chapter 7 cases, courts will issue an order indicating that there is no need to file a proof of claim until further notice. The reason for this is that, absent a finding that there are assets, there may well be no distribution to unsecured creditors.

5. Secured creditors and deficiency claims.  As a general rule, only unsecured creditors need to file proofs of claim in order to be placed “in the distributional queue.” But if a secured creditor desires to retain a deficiency claim, it too should file.  Fink at 14.  In other words, secured creditors should file in order to preserve possible distribution on account of any unsecured deficiency.  Significantly, the failure to file a claim will not destroy or eliminate a secured creditor’s lien or interest in the property of the estate.  Fink at 14-15.  A lien remains unaffected by bankruptcy unless it specifically is altered by the court.   

6. Informal proof of claim.  Bankruptcy courts have developed an equitable doctrine known as an “informal proof of claim” that can sometimes permit a claim to be asserted via something other than a formal proof of claim.  The Fink opinion provides a thorough analysis of this doctrine.  Judge Grant found that the situations in which “informal claims” should be allowed are extremely narrow.  In Fink, the Court found that a creditor had not, via a motion for relief from stay, asserted an informal claim.  The creditor was unable to avoid strict enforcement of the claims bar date.
 
Turning to this blog’s true purpose, which is to provide a resource for secured lenders facing loans in default, Judge Grant’s opinion provides a nice refresher on the rules for filing proofs of claims.  The message is to determine quickly whether you need a proof of claim and, if so, to ensure you timely file it, even if you have or will be seeking other relief in the bankruptcy proceeding such as an order modifying the automatic stay.  Actually, the filing of a proof of claim is fairly painless, and there really is no downside to filing one.  When in doubt - file.