Foreign Claimants? No Problem. All You Need Is a Postage Stamp to Satisfy Claims-Objection Service and Declarations from the Debtor to Assert § 502(d) Disallowance

On Nov. 13, 2015, in the U.S. Bankruptcy Court for the Southern District of New York, Judge Glenn issued a memorandum opinion in In re Vivaro Corp., et al.[1] with the following rulings: (1) a claim objection against a foreign entity may be served by U.S. mail under Bankruptcy Rule 3007 and need not be served in the same manner required for service of a summons and complaint in accordance with Rule 7004; and (2) when a claim objection is based on § 502(d) of the Bankruptcy Code, the debtors must meet their burden under § 547 of the Bankruptcy Code regarding the receipt of an avoidable transfer before the court will disallow and expunge such claims.

In Vivaro, various foreign entities from Pakistan, Costa Rica, Canada, London, El Savador, and others filed proofs of claim in the debtors’ cases. Vivaro Corp., et al. (the “debtors”) filed various objections to such claims, as well as to the scheduled claims of such foreign creditors. At the same time, the debtors initiated preference actions against such foreign creditors. The bases for the claims objections included § 502(d) of the Bankruptcy Code, which permits the disallowance (even if temporarily) of a claim if there are pending allegations of unreturned preference transfers.

Debtors served the claims objections upon the foreign creditors via U.S. mail with attached copies of the preference transfer complaints to the notices of claims objection. The debtors used the address listed on the debtors’ schedules or listed on the appropriate proof of claim. In the packet sent to the foreign creditors, the debtors included a declaration from the debtors in support of their claim objections, which informed each claimant that they were in receipt of an avoidable preference transfer and provided the standard for a preference payment under § 547 of the Bankruptcy Code

Judge Glenn ruled that Bankruptcy Rule 3007 applies to claims objections and permits service by U.S. mail, which includes service by mail on foreign entities, and therefore, the debtors’ properly served notice of claims objection to each foreign entity by U.S. mail. Bankruptcy Rule 3007 states that “[a] copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing.”[2] Service by Rule 7004(a) was not necessary. Bankruptcy Rule 7004(a) provides that in adversary proceedings, personal service under Rule 4(e)–(j) F.R.Civ.P. may be made by any person at least 18 years of age who is not a party, and the summons may be delivered by the clerk to any such person.[3]

The standard of service of a summons and complaint upon an individual in a foreign country is governed by Fed. R. Civ. P. 4(f)(1), which is made applicable to adversary proceedings by Bankruptcy Rule 7004(a). Service must be “[b]y any internationally agreed means reasonably calculated to give notice, such as those means authorized by The Hague Convention….”[4]

The Vivaro court rejected the Jorgenson v. State Line Hotel Inc.[5] decision that Rule 7004 applies to the service of claims objections, and the Vivaro court concluded that “Rule 9014 defers to Rule 3007 on the subject of claims objections: [Rule 3007] calls for an objection, not a motion, and authorizes notice, rather than requiring service.” The court further reasoned that there is no reason to require different rules of service when dealing with claims filed by foreign entities.

Regarding the second issue, the Vivaro court ruled that if the debtors showed proof to the court that preferential transfers were made and not repaid, then § 502(d) of the Bankruptcy Code requires that the entire claim be disallowed unless the full amount of the avoidable transfer has been repaid. The court, however, must be satisfied that the estate or estate representative has established a prima facie basis that the claimants received and have not repaid avoidable transfers. Although the complaint was not properly served in accordance with Rule 7004(a), copies of the complaint and the debtors’ declaration provided the claimants with notice and evidence of the avoidable transfers. Such service shifted the burden to the claimants to rebut the evidence that they had received an avoidable preference. In this case, none of the claimants responded to the claims objections or made any attempt to repay the preference transfer to the estate.

The court held that once a claimant’s liability has been determined, the claimant must be provided with a reasonable opportunity to turn over the property to the debtor’s estate in compliance with § 502(d) of the Bankruptcy Code before the claims may be disallowed. If the creditor is liable to the estate for having received an avoidable transfer in any amount, then the creditor’s entire pending claim must be disallowed in full.

Practice Pointers:

·      If you have a foreign claimant, service of a claims objection by U.S. mail will suffice.

·      If you are attempting to disallow a creditor’s claim based on § 502(d) of the Bankruptcy Code, you must first establish a prima facie basis that the claimant received and has not repaid avoidable transfers. Copies of the preference complaint together with a declaration from the debtor should suffice.