Source: Dorsey & Whitney
Article Authors: Dorsey & Whitney Bankruptcy Team for Foreign Suppliers
This
Series Four will address questions relating to how claims are filed and dealt
with in a Chapter 11 bankruptcy case.
1. Question:
Is there a deadline for filing claims and, if so, how do I find out that
deadline?
The deadline
to file claims in a bankruptcy case is referred to as the “bar date” and it is
one of the most critical dates in the bankruptcy case. Indeed, if a claim is
filed late, it may be disallowed. Unfortunately, there is no standard manner in
which bar dates are set in Chapter 11 cases. Rather, in some judicial
districts, Chapter 11 debtors must file an application with the bankruptcy
court to have a bar date set. In other judicial districts, the bar date is set
automatically when the case is filed. Although notice of the bar date must be
served on all known creditors, it is important to have a U.S. bankruptcy
attorney monitor a Chapter 11 case to identify the bar date as promptly as
possible, and even prior to when notice is sent to creditors.
2. Question:
What is the process for filing a claim?
While the
proof of claim form is relatively simple and straightforward, it requires a
substantial amount of information and, particularly with respect to claims of
creditors located outside the U.S., should be prepared with the assistance of
counsel in order to avoid mistakes that could result in your claim being
disallowed and to best protect your rights as a creditor in the bankruptcy
case. In order for you or your attorney to complete the form, you will need detailed
information about how much was owed as of the date the debtor filed its
bankruptcy case, including interest and fees. You will also need to submit
supporting documents along with the proof of claim or an explanation as to why
such documents are unavailable. While the creditor must note the amount, type,
and nature of the claim on the proof of claim form itself, it is advisable to
include an addendum to your claim that sets forth in greater detail the basis
of the claim and includes important reservation of rights provisions regarding
your claim.
You should
ensure that the proof of claim is true to the best of your knowledge because
proofs of claim are executed under penalty of perjury. Once the proof of claim
is completed, it will need to be filed. In some cases, claims are filed
directly with the bankruptcy court through the e-filing system. But, in larger
cases, a third-party claims administrator appointed by the court accepts the
filing of claims either in hard copy or electronically. A U.S. bankruptcy
attorney will be able to ensure the claim is correctly and timely filed. Once
filed, proofs of claim may be amended (even after the bar date), in certain
circumstances.
3. Question:
How are different types of claims treated in Chapter 11 and are certain claims
given priority over others?
How claims
are treated in a Chapter 11 bankruptcy case depends on the type of claim:
- Secured
claims, in most instances, remain unaffected by the bankruptcy filing
and are deemed to be secured to the same extent as prior to the bankruptcy. If
the value of the secured creditor’s collateral is less than its claim, the
secured creditor will be treated as having a partially secured claim up to the
value of the collateral and a general unsecured claim for the balance. As a
result, secured claims generally should either be paid in full (up to the value
of the underlying collateral), in cash or other distributions, or the claims
remain secured and pass through the bankruptcy case unaffected.
- Administrative
expense claims are those that are given first priority
of payment in the bankruptcy case. These claims are generally for those that
directly benefit the bankruptcy estate, such as the cost of goods and services
supplied to the debtor during the bankruptcy case. While most administrative
expense claims arise during the bankruptcy case, claims for goods sold in the
20 days prior to the bankruptcy filing are also given administrative expense
priority. Subject to certain limited exceptions, all administrative expense
claims must be paid in full in order for a Chapter 11 plan to be confirmed.
- Priority
claims are those that arose prior to the bankruptcy case, but are
entitled to priority of payment. These claims include claims for the debtor’s
employee wages and benefits (up to a cap), certain taxes, and certain customer
deposits. To the extent there are sufficient funds, the Bankruptcy Code
requires that these claims be paid in full, either soon after confirmation or
over time, in order for a Chapter 11 plan to be confirmed.
- General
unsecured claims are those that arose prior to the
bankruptcy case and not entitled to priority treatment. These claims include
those for goods sold to a debtor prior to the bankruptcy filing and outside the
20-day window discussed above, and for which the creditor did not obtain a
security interest. General unsecured claims are only entitled to payment after
all priority claims are paid in full and often only receive a small percentage
recovery.
- Equity
interests are those belonging to shareholders and, subject to
certain exceptions, are only entitled to payment after all creditors are paid
in full.
The foregoing treatment is what can be
expected in a successful Chapter 11 case that results in a confirmed plan. In
the event a Chapter 11 case is not successful, the priorities may change. We
will address what happens in unsuccessful cases in a future series.
4.
Question: Can a supplier seek to bar the discharge of its debt?
Yes, but
permissible bases for doing so are limited. The Bankruptcy Code sets forth a
number of grounds for preventing a debt from being discharged. In order to have
a debt determined to be non-dischargeable on the basis that it arose from
fraud, defalcation, or willful or malicious injury, a creditor must commence an
action in the bankruptcy court to request such a determination. You should
consult a U.S. bankruptcy attorney if you believe there are grounds for barring
the discharge of your debt as soon as possible, as the deadline for commencing
a non-dischargeability action is 60 days after the first Section 341 meeting of
creditors (see Series Three for more information on such meetings).
5. Question:
What happens if the debtor disagrees with the amount or nature of a supplier’s
claim?
If a
debtor – or a trustee or other party authorized to object to claims asserted
against the debtor – disagrees with what you have asserted in your proof of
claim (whether the amount of the claim or its type), the debtor may either
reach out to you directly to resolve the dispute or it may file an objection
with the bankruptcy court setting forth why the debtor believes the claim is
incorrect or barred, or should be disallowed. Regardless, it is prudent to
retain U.S. bankruptcy counsel to resolve any claims dispute on your behalf,
either through informal negotiations or by formally responding to an objection.
Keep in mind, there are no deadlines for filing objections to claims in the
Bankruptcy Code or Bankruptcy Rules and, often, Chapter 11 plans will permit
the filing of objections to claims after confirmation.
6. Question:
Can an unsecured creditor sell its claim?
Yes,
absolutely. As with anything, there are no guarantees in bankruptcy,
particularly with respect to recoveries for unsecured creditors. Accordingly,
if you are holding an unsecured claim, you may wish to at least consider the
option of selling the claim to a third party at a discount to obtain some
guaranteed recovery rather than wait until the conclusion of the case and the
distribution, if any, to holders of such claims.
***For any questions regarding this article, kindly
contact:
Catherine Pan Giordano (pan.catherine@dorsey.com)