Summary of a Recent
Judicial Development in
Bankruptcy

Failure to Comply with Claim Deadline
Results in Absolute Bar to Recovery

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Brooks, 370 B.R. 194 (Bankr. C.D. Ill. 2007), the United States Bankruptcy Court for the Central District of Illinois held that the Creditor's proof of claim was not filed timely and did not fall under any exceptions to the claim deadline rule, and was therefore barred.

Background

Debtors filed for Chapter 13 relief in July 2003. Id. at 195. They owned a motor home valued at $70,000. Id. Fifth Third Bank held a lien on the motor home. Id. The Bank received a notice of the filing, informing them that they had 90 days to file a proof of claim. Id. at 196. The notice clearly stated that the creditor must file, even if he is listed on the debtor's schedules, or he might not be paid. Id. Subsequently, the Bank obtained relief from the automatic stay and foreclosed on the motor home, and auctioned it for $38,000. Id. Five months after the auction, and one year after the expiration of the claim bar date, the Bank filed a proof of claim for the balance owed by the Debtors, and the Chapter 13 Trustee objected. Id.

Arguments

The Trustee argued that the Bank's claim was not timely filed, and was thus barred. Id.

The Bank argued that the Chapter 13 plan did not impose a time limit upon the bank for filing a claim of deficiency balance, that Fed. R. Bankr. P. 3002 only required unsecured creditors to file claims and they were secured, and that their claim should be allowed under the informal proof of claim doctrine since its Motion for Relief from the Automatic Stay was filed before the claim bar date. Id.

Analysis and Holdings

The court noted that under 11 U.S.C. § 502(b)(9), claims that are not timely filed are barred. Id. The rule technically only applies to unsecured claims, but most courts hold that a secured creditor must also file a proof of claim to receive payments. Id. at 196-97. There are six exceptions to the bar which pertain to claims of governmental units, infants and incompetent persons, recipients of avoided transfers, parties to executory contracts or unexpired leases, foreign creditors, and claims in Chapter 7 cases that began as no asset cases. Id. at 197. None of those exceptions applied to this case. Id. The court held that the fact that the plan did not impose a time limit was irrelevant and did not trump the claim deadline rule. Id. at 198. The court also rejected the Bank's argument that because they were an undersecured creditor, not an unsecured creditor, they were exempt from the rule, stating that "the lack of merit to this argument has long been established." Id. at 199.

Regarding the Bank's argument that their Motion for Relief from Automatic Stay should qualify as a proof of claim under the informal proof of claim doctrine, the court refused to apply the doctrine because historically the doctrine was meant to cure defective proof of claims that failed for technical reasons. Id. at 201-02. "It should not be found in a masquerade in which some other type of relief is sought and then subsequently unmasked to reveal what is argued to have been a proof of claim all along." Id. at 202. The court emphasized that this is especially true for law firms and experienced bankruptcy practitioners, who as professionals "are expected to know the difference between motions and objections and adversary proceedings and claims, and they are expected to file the appropriate thing at the appropriate time." Id. The court also noted if they did apply the doctrine, it would effectively be creating a new exception to the claim deadline rule. Id. Therefore the court sustained the Trustee's objection and denied the Bank's proof of claim. Id. at 205.

The case was decided on June 22, 2007.