Demystifying the Claims Administration Process
by: Evelyn J. Meltzer
Pepper Hamilton LLP; Wilmington, Del.
by: Howard A. Cohen
Drinker, Biddle & Reath LLP; Wilmington, Del.
To most creditors, the claims administration process is mysterious and baffling. This is because most creditors simply do not understand what happens from the time a claim is asserted (either via the debtor’s schedules or by filing a proof of claim) to the time that distributions on account of such claims are actually made to creditors. Because in a large chapter 11 case, years can pass without a creditor hearing anything regarding the status of its claim, many creditors make the mistake of thinking no news is good news. Unfortunately, this is not necessarily the case. Just because a creditor has not heard from the debtor regarding its claim does not mean that its claim will ultimately be allowed. Rather, during this time, the debtor is hard at work directing the claims administration process. Failure to understand the claims administration process can result in a creditor’s claim being reclassified, reduced or even disallowed. This article addresses key steps that occur during the claims administration process and the hazards that exist for the unwary creditor.
Amending the Schedules
Pursuant to §107(c) of the Bankruptcy Code, a debtor is required to file a schedule of its pre-petition debts with the bankruptcy court within 15 days of the commencement of a chapter 11 case (absent an extension). The schedules identify the debtor’s creditors and the amount and class of each creditor’s claim. Further, the schedules specify whether the debtor considers the claim contingent, unliquidated or disputed. A claim that is listed on the debtor’s schedules is deemed filed and constitutes prima facie evidence of the validity and amount of the claim unless the claim is scheduled as contingent, unliquidated or disputed. One issue that may occur during the claims administration process is the debtor may realize that its schedules do not correctly reflect its pre-petition liabilities and that the schedules should therefore be amended. Pursuant to Federal Rule of Bankruptcy Procedure 1009, a debtor may amend its schedules as a matter of course at anytime before the case is closed.
Because the debtor has the right to amend its schedules at anytime before the case is closed, and because large chapter 11 cases typically remain open for many years, a scheduled creditor who decides not to file a proof of claim should not rest on its laurels during the pendency of the bankruptcy case. Rather, a scheduled creditor should monitor the bankruptcy proceeding and carefully review any notices it receives regarding amendments to the debtor’s schedules. If the debtor amends its schedules, the creditor, in consultation with bankruptcy counsel, should review the amended schedules to determine if the creditor agrees with the amount, nature and classification of its claim as reflected in the amended schedules. If the creditor disagrees with its amended scheduled claim, it is critical that the creditor timely file a proof of claim. A creditor who does not timely file a proof of claim will have its claim treated as reflected in the amended schedules.
Tying Scheduled Claims and Proof of Claims
Pursuant to Federal Rule of Bankruptcy Procedure 3004(c)(4), a proof of claim filed by a creditor supersedes a scheduled claim. Without this rule, a creditor might receive double payment on account of being scheduled and having filed a proof of claim. In order to avoid this unjust result, one step undertaken during the claims administration process is to tie the claims scheduled on behalf of the claimant with the proof of claim filed by the claimant. It is extremely important that a creditor filing a proof of claim understand that the proof of claim is not simply related to the corresponding scheduled debt but rather to any and all amounts scheduled on behalf of the creditor. In other words, any and all amounts scheduled on behalf of a creditor are related to and superseded by the proof of claim filed by the creditor.
For example, imagine that ABC Co. is scheduled for a $500 general unsecured claim as a result of goods shipped to the debtor’s Florida warehouse (the Florida debt) and is scheduled for a $300,000 general unsecured claim for goods shipped to the debtor’s Texas warehouse (the Texas debt). ABC Co. files a claim asserting that it is owed $1,000 on account of the Florida debt. The proof of claim does not indicate that any amount is due and owing on account of the Texas debt. At no time prior to the applicable bar date does ABC Co. amend its proof of claim to include the Texas debt or file a separate proof of claim asserting the Texas debt. Unless ABC Co. can show that the Texas debt and the Florida debt arise out of the same conduct, transaction or occurrence, failure to include the Texas debt in ABC Co.’s original proof of claim may result in the Texas debt being uncollectible. Again, this is due to the fact although ABC Co. was scheduled for both the Florida debt and the Texas debt, the Bankruptcy Rules treat the proof of claim as superseding all scheduled claims relating to ABC Co.
As illustrated by the above example, because a proof of claim supersedes a scheduled claim, it is essential that a creditor assert all amounts due and owing the creditor when filing a proof of claim. Failure to do so may result in a creditor being unable to collect amounts due and owing it as a result of the claims administration process.
Avoidance Actions
Although at first blush avoidance actions may not appear to be related to the claims administration process, such lawsuits are often used as a means of disallowing a creditor’s claim. Pursuant to §502(d) of the Bankruptcy Code, a court may disallow a creditor’s claim if the creditor is the recipient of an avoidable transfer and the creditor refuses to repay the avoidable transfer. For this reason, when it comes to filing avoidance actions, most debtors include a §502(d) count in their complaint. To the extent the creditor ignores the avoidance action and a default judgment is entered against such creditor, the effect of the §502(d) count is to disallow the creditor’s claim. As such, it is important that a creditor closely monitor the bankruptcy proceeding to determine whether the debtor (or an estate representative) has commenced an adversary proceeding pursuant to which the debtor seeks disallowance of the creditor’s claim.
Additionally, even if a creditor is vigilant and actively defends such an adversary proceeding, many form-settlement agreements contain language requiring the claimant to waive any and all claims the creditor has against the debtor, including its pre-petition claim. Furthermore, many form-settlement agreements contain a provision requiring the claimant to waive its §502(h) claim, which is a provision entitling a creditor to a general unsecured claim for the amount such creditor paid to the trustee/debtor in settlement of the avoidance action. Accordingly, it is important that a creditor have its bankruptcy counsel carefully review any proposed settlement agreement in order to ensure that the claimant does not inadvertently waive its pre-petition claim or its §502(h) claim in connection with settlement of the avoidance action.
Objections to Claims
Because a proof of claim is deemed allowed unless a party in interest objects to the claim, one of the major undertakings of the claims administration process is the review and reconciliation of claims. The debtor’s reorganization plan (or liquidation plan as the case may be) will set forth a specified time period pursuant to which the debtor (or estate representative) must object to claims. Because the time period specified in the plan rarely provides the debtor with enough time to object to claims, it is very typical for motions to be filed in the bankruptcy case seeking an extension of the claims objection deadline. A creditor must be aware of the fact that just because its claim was not objected to in the initial time period set for objections under the plan does not mean that its claim has been allowed.
The debtor (or the estate representative) will review of all the claims filed in the bankruptcy case in order to determine which claims are objectionable. There are endless reasons a debtor may object to a claim. For one, the debtor may disagree with the amount the creditor believes is due and owing it. Additionally, the debtor may disagree with classification of the claim asserted by the claimant. Furthermore, a debtor may object to a claim because the claimant has not attached any documentation in support of the claim or has attached inadequate documentation in support of the claim. Moreover, the debtor may object to a claim because the claim is duplicative of another claim filed by the creditor or because the claim has been amended and superseded by another claim filed by the creditor.
Once the debtor has determined which claims are objectionable, the debtor will begin to file claim objections. While the debtor may object to each claim individually, in large chapter 11 cases debtors often file omnibus objections to claims, which set forth various categories of objections. For example, a debtor may file an omnibus objection objecting to those claims on Exhibit A as late filed claims and those claims on Exhibit B as duplicate claims. The failure of a creditor listed on an exhibit to an omnibus claims objection to timely respond to the claim objection may result in such creditor having its claim reclassified, reduced or even disallowed. As such, it is extremely important that throughout the pendency of a bankruptcy case, that the creditor, in connection with bankruptcy counsel, monitor the bankruptcy case and carefully review each claim objection and any corresponding exhibits filed with the court. Only by being diligent can a creditor ensure that its legal rights are not inadvertently waived.
Conclusion
This article addresses some of the key steps a debtor undertakes during the claims administration process in an attempt to demystify such process and to shed light on the some of the pitfalls that exist for the unwary creditor. A creditor who understands how the claims administration process works and the various traps that exist is more likely to have its claim allowed in full.