The Handling of Proofs of Claim in “Claims Agent” Cases
Kenneth M. Freda and Craig Johnson
Garden City Group Inc.; Melville, N.Y.
Handling and processing proofs of claim is vital to any chapter 11 case. Together with the chapter 11 debtor’s scheduled liabilities, proofs of claim establish the debtor’s potential exposure to its creditors. For pre-petition creditors, proofs of claim offer the only opportunity to assert their claim in the chapter 11 case.1 Failing to account for a timely-filed proof of claim can significantly harm a debtor by introducing a previously unknown liability (or a liability in an amount greater than, or a classification different than, that reflected in its schedules) at an inopportune time. Likewise, if a pre-petition creditor’s liability is unscheduled (or is scheduled in an amount less than, and/or with a classification of a lesser priority than, the creditor is actually entitled) and the creditor fails to timely file a proof of claim, that creditor will likely lose any right to receive a distribution under the reorganization plan (or will receive a distribution based on the incorrect scheduled amount and/or classification). Accordingly, the manner in which proofs of claim are processed may have significant bearing on the outcome of a case.
To relieve the bankruptcy court of the heavy burden of administering large cases with a significant number of creditors, courts may order the appointment of a claims agent pursuant to §156(c) of title 28 of the U.S. Code. According to §156(c), “any court may utilize facilities or services, either on or off the court’s premises, which pertain to the provision of notices, dockets, calendars and other administrative information to parties in cases filed under the provisions of title 11, U.S. Code, where the costs of such facilities or services are paid for out of the assets of the estate and are not charged to the United States. The utilization of such facilities or services shall be subject to such conditions and limitations as the pertinent circuit court may prescribe.” This article will explore how proofs of claim are handled and processed in cases where a claims agent has been appointed by the bankruptcy court.
Cases Involving Claims Agents
A few jurisdictions have customary practices that dictate when a claims agent is to be retained and the procedures claims agents are to follow when processing proofs of claim. For instance, the U.S. Bankruptcy Court for the District of Delaware customarily requires a debtor to retain a claims agent if there are more than 200 creditors in a given case, while the U.S. Bankruptcy Court for the Southern District of New York customarily requires a debtor to retain a claims agent if there are more than 1,000 creditors in a case (although there are numerous instances of this court requiring the retention of a claims agent in cases with between 500 and 1,000 creditors, based on the particular circumstances of the case).
It is important to note at the outset that the procedures for handling proofs of claim in “claims agent” cases differ from jurisdiction to jurisdiction.2 The vast majority of bankruptcy courts, however, appear to establish procedures governing the claims agent’s duties and responsibilities on a case-by-case basis.
Printing and Service of the Bar Date Notice
One of the most significant milestones in a chapter 11 case, and one that should be closely monitored by the claims agent, is the bar date for filing proofs of claim, which is, in most cases, established pursuant to an order of the bankruptcy court in response to a motion by the debtor. As it is the claims agent who will customarily serve upon the creditors the bar date notice, proof-of-claim form and accompanying instructions, it is recommended that debtor’s counsel coordinate closely with the claims agent in connection with the drafting of these documents (as well as the bar date motion and the proposed bar date order) in order to ensure that the delivery instructions provided to creditors therein are correct3 and to provide the claims agent the opportunity to provide its input as to formatting of the documents, service requirements4 and the like. Unlike bankruptcy courts, most claims agents print “customized” proofs of claim; i.e., each proof of claim is imprinted with the creditor’s name, address, the amount and priority of its claim as listed in the debtor’s schedules, and a distinctive bar code. Where customized printing is used, the bar code enables the claims agent’s database to automatically link filed proofs of claim with their scheduled counterparts.
Receipt and Retrieval of Filed Proofs of Claim
In “claims agent” cases, many bankruptcy courts, including Delaware, instruct creditors to send their proofs of claim directly to the claims agent’s post office box (or street address), thus bypassing the court completely. Upon receipt of a proof of claim, the claims agent affixes its “received” stamp on the claim (which includes the date the claim was received) and also indicates thereon the assigned claim number (which is assigned chronologically in the same manner in which bankruptcy courts assign claim numbers). The claim is then scanned into the claims agent’s database and prepared for processing and entry onto the official claims register, which in such cases is maintained by the claims agent, not the bankruptcy court.
In the Southern District of New York, the bankruptcy court requires that creditors send their proofs of claim to a post office box at a specified post office located near the bankruptcy court, and directly to the bankruptcy court if delivery is effected by hand or overnight courier.5 The claims agent (or its designee) retrieves the proofs of claim from the post office box and brings them directly to the bankruptcy court premises, where the claims agent (or its designee) affixes its “received” stamp on the proof of claim (which includes the date the claim was received) and indicates thereon the assigned claim number. It then scans the first page of the proof claim onto a CD-ROM, which it delivers to the clerk of the bankruptcy court. The claims agent, rather than the bankruptcy court, maintains the official claims register.
By contrast, the U.S. Bankruptcy Court for the District of New Jersey requires that creditors send their proofs of claim directly to the bankruptcy court, which affixes its “received” stamp on the proof of claim (which includes the date the claim was received), without numbering the proof of claim or scanning it, and then forwards the proof of claim (usually in large batches with other proofs of claim filed in the same case) to the claims agent.6 At the far end of the spectrum, in the few “claims agent” cases filed in the Southern District of West Virginia, the Southern District of Ohio and the Eastern District of Washington, the bankruptcy courts therein not only directed that proofs of claim be sent directly to them, but also maintained the official claims register themselves and, at least in the cases in the Southern District of Ohio and the Eastern District of Washington, did not provide the originals or copies of the proofs of claim to the claims agent.
In light of the electronic case filing system (ECF) adopted by virtually all bankruptcy courts, some creditors, despite court orders and notices that restrict the filing method to mail, hand delivery or overnight courier, file their proofs of claims online.7 Accordingly, claims agents must retrieve these claims from the bankruptcy court’s docket. Claims agents with an attorney on staff may qualify to obtain an ECF password and thus receive automatic e-mail notification of all proofs of claim filed. In the absence thereof, the claims agent must undertake daily or other periodic “manual” monitoring of the docket.
Many creditors wait until the last possible moment to submit their proofs of claim, resulting in the arrival of proofs of claim at the claims agent’s post office box (as well as its physical location) on the actual bar date. Therefore, it is absolutely critical for a claims agent (or its designee) to be present at its post office box at the “deadline time” on the bar date in order to ensure that all timely filed claims are accurately accounted for.
Processing and Reporting
As stated above, after a claims agent receives a proof of claim, it processes the claim, which typically involves scanning an image of the claim into its database and inputting the amount and classification of the claim, the other information provided in the proof of claim and any deficiencies therein. In claims agent cases in most jurisdictions, the claims agent, rather than the bankruptcy court, is responsible for maintaining the official claims register, which it will provide to the bankruptcy court (in electronic format in virtually all jurisdictions) and post on the case Web site maintained by the claims agent. As claims agents generally record more data from proofs of claim than do bankruptcy courts, most claims agents are capable of providing, in addition to a standard claims register, virtually limitless claims reports to the debtor and its professionals based on any combination of claim amounts, classification, characteristics and/or deficiencies, as well as deviation from amounts contained in the debtor’s schedules.
The End of the Line
Once the claims agent images a proof of claim in its database, it stores the hard copy original in a secure area from which it may be retrieved on short notice (although given the instantaneous availability of the scanned image, the viewing of an original is rarely requested). Traditionally, following the closing of a case, certain jurisdictions, such as the Southern District of New York, direct the claims agent to deliver the original proofs of claim directly to the National Archives, while other jurisdictions, such as Delaware, require the claims agent to deliver the originals and a CD-ROM containing the images to the bankruptcy court.
1 This is true in virtually all cases except mass-tort cases, where personal-injury claimants are customarily not required to file a proof of claim; rather, they assert their claims against the trust established pursuant to the reorganization plan.
2 Bankruptcy courts throughout the country were telephonically surveyed in connection with this article.
3 Claims agents typically open a post office box for each case in which they are retained. In addition, the claims agent’s street address should be provided in order to accommodate overnight courier services and personal delivery.
4 In the event that the bankruptcy court requires publication of the bar date notice, many claims agents can assist the debtor in this regard through their in-house legal advertising departments.
5 The U.S. Bankruptcy Court for the Southern District of New York requires the claims to be sent directly to the court because it strictly interprets 28 U.S.C. §156(e), which states: “In a judicial district where a bankruptcy clerk has been appointed pursuant to subsection (b), the bankruptcy clerk shall be the official custodian of the records and dockets of the bankruptcy court.”
6 The claims agent is required to provide pre-paid overnight courier labels to the U.S. Bankruptcy Court for the District of New Jersey.
7 The validity of claims filed solely online in such circumstances may be the subject of an objection.