When fair minds disagreed about what’s equitable, the Tenth Circuit upheld the bankruptcy court’s exercise of discretion because the bankruptcy judge made “a reasonable and a permissible choice between competing equitable considerations.”

A creditor was “intimately” involved in the chapter 7 case of a corporate debtor. Early in the case and before the claim-filing deadline, the creditor filed extensive papers aiming for a modification of the automatic stay. The creditor did not accompany the lift-stay motion with the filing of a proof of claim. The bankruptcy court denied the lift-stay motion.

The Late Claim

Two days after the deadline for filing claims, the creditor filed a proof of claim for about $70,000. Six days after filing the late claim, the creditor filed a motion to amend an “informal” proof of claim filed before the deadline. The creditor contended that its papers on the lift-stay motion were an informal claim.

The creditor explained that its proof of claim had been prepared and approved two months before the claim-filing deadline. The creditor said that the claim had not been filed on time due to “miscommunication within the law firm.”

Bankruptcy Judge Janice D. Loyd of Oklahoma City denied the creditor’s motion for allowance of the informal claim, applying the Tenth Circuit’s five-factor test in In re Reliance Equities, Inc., 966 F.2d 1338, 1345 (10th Cir. 1992). Judge Loyd found that the equities, one of the five tests, did not favor allowing the informal claim.

On the creditor’s appeal, the district court reversed, finding an abuse of discretion. The district court believed that the status as the largest creditor and the trustee’s knowledge of the claim outweighed equitable factors relied on by the bankruptcy court.

The trustee appealed and won in a nonprecedential opinion by the Tenth Circuit on July 25.

Appellate Jurisdiction

The district court had remanded, raising the question of whether the district court’s order was a final order subject to appeal.

The appeals court decided that the “practical effect of the remand order was ministerial” and did not require the bankruptcy court “to make further findings.” The panel held that the order of the district court met the “finality requirement” in 28 U.S.C. § 158(d) to establish appellate jurisdiction.

‘Permissible Choice’ Isn’t Abuse of Discretion

The Tenth Circuit reviewed the bankruptcy court’s decision for abuse of discretion in applying the five factors in Reliance that must all be met.

Bankruptcy Judge Loyd had found that the creditor’s lift-stay motion satisfied two Reliance requirements: a writing that was filed in the bankruptcy court. However, Judge Loyd found that the creditor had not satisfied two other requirements: a demand on the estate and an expression of intent to hold the debtor liable.

In the words of the circuit court, Bankruptcy Judge Loyd also “found that [the creditor] did not meet the fifth factor either because the equities did not favor applying the informal proof of claim doctrine.” More particularly, the appeals court said that Judge Loyd “based [her] conclusion on [the creditor’s] sophistication and representation by experienced counsel, its knowledge of the claims bar deadline, and its failure to articulate any compelling reason for missing it.”

The circuit court said that the district court reversed because it believed that “other equitable considerations outweighed the factors that swayed the bankruptcy court.” To decide the appeal, the Tenth Circuit was faced with picking between the bankruptcy court’s or the district court’s conclusions about equity.

“[W]eighing the competing equities to reverse the bankruptcy court,” the circuit court said, “would amount to ‘substitut[ing] our own judgment for that of the [bankruptcy] court . . . .’ [W]e cannot say the bankruptcy court ‘ma[d]e a clear error of judgment or exceed[ed] the bounds of permissible choice under the circumstances.’”

“Rather,” the circuit said, Bankruptcy Judge Loyd “made a reasonable and a permissible choice between competing equitable considerations. It therefore did not abuse its discretion.”

Having found no abuse of discretion in Judge Loyd’s decision about the equities, the Tenth Circuit reversed the judgment of the district court, affirmed Judge Loyd’s judgment and had no reason to “consider the other [Reliance] factors.”