A Primer on the Bankruptcy Claims Process

The claims process is a fundamental part of every bankruptcy case, in that it establishes the overall amount owed to a debtor’s creditors as of the filing date of the debtor’s case. The process commences with the filing of a debtor’s schedules of assets and liabilities, as well as a statement of financial affairs (SOFAs), which set forth the amount of secured, priority unsecured and general unsecured claims as showing on the debtor’s books and records as of the filing date. Each creditor has the opportunity to file a proof of claim against the debtor, to which the debtor may object. Only upon a bankruptcy court’s entry of final order(s) in a case may a debtor and the creditors know the full scope and amount of the claims against the debtor.

Schedules and SOFAs: The First Step
Unless a court orders otherwise, each chapter 11 debtor is required to file (1) schedules of assets and liabilities, (2) a schedule of executory contracts and unexpired leases and (3) a SOFA. 11 U.S.C. § 521(a); Fed. R. Bankr. P. 1007(b). The schedules and SOFAs provide information regarding a debtor’s financial condition as of the filing date. In accordance with the amendment to Rule 1007(c) dated Dec. 1, 2009, the schedules and SOFAs shall be filed within 14 days after the filing of the voluntary petition, if not filed with the petition. Fed. R. Bankr. P. 1007(c). “Any extension of time to file schedules, statements, and other documents required under this rule may be granted only on motion for cause shown and on notice to the United States trustee, any committee elected under § 705 or appointed under § 1102 of the Code, trustee, examiner or other party as the court may direct.” Id.

Schedules D, E and F list the debtor’s secured, unsecured priority and general unsecured claims, respectively, including the amount of such claims as they appear on the debtor’s books and records as of the filing date. The creditors listed on schedule D include those holding any type of security interest in the debtor’s property, such as mortgages, deeds of trust, security interests or deposits granted voluntarily in personal property, judgment liens, statutory liens, property taxes and other security interests evidenced by perfected financing statements. The creditors listed on Schedule E are those entitled to priority pursuant to 11 U.S.C. § 507(a). Examples of Schedule E claims include (1) wages, salaries and commissions, including vacation, severance and sick leave, in an amount up to the statutory cap, 11 U.S.C. § 507(a)(4); (2) money owed to employee-benefit plans for services rendered within 180 days immediately preceding the filing date in an amount up to the statutory cap, 11 U.S.C. § 507(a)(5); and (3) taxes, customs, duties and penalties owing to federal, state and local government units. 11 U.S.C. § 507(a)(8). The creditors listed on schedule F are those whose claims are not secured and not entitled to priority, and usually include unsecured trade payable claims, contract rejection damage claims and litigation claims. With respect to each listed claim on schedules D, E and F, a debtor may assert that a claim is “contingent,” “unliquidated” and/or “disputed.” As discussed more fully below, whether one or more of these boxes is checked is important in helping a creditor determine whether a proof of claim must be filed.

Filing a Proof of Claim Prior to the Bar Date
Generally, a debtor files a motion for an order setting the “bar dates” and procedures for filing proofs of claim. The bar dates may include (1) a deadline for all persons or entities, other than governmental units, to file proof of a nongovernmental claim; (2) a deadline for all governmental units to file proof of a governmental claim (11 U.S.C. § 502(b)(9) provides that “a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide…”); (3) a deadline for filing a proof of claim with respect to an amended schedule claim (e.g., for circumstances where the debtor reduces or deletes a claim from its schedules or changes its contingent, unliquidated or disputed status on a schedule); and (4) a deadline for filing a proof of claim relating to the debtor’s rejection of an executory contract or an unexpired lease.

Once an order is entered approving the bar dates and procedures for filing proofs of claim, a detailed notice of such information, along with a proof of claim form is mailed to, among others, all parties on the debtor’s creditor matrix, which includes (1) the parties on schedules D, E, F, G and H; (2) all known potential creditors not otherwise included in a debtor’s schedules; (3) all parties that requested notice pursuant to Rule 2002 of the Code, including counsel to any pre-petition or debtor-in-possession credit facilities and counsel to any committee of creditors or equity security-holders that may have been appointed; (4) all equity-holders; (5) all entities who are party to an executory contract or unexpired lease with the debtor; (6) all entities who are adverse to the debtor in any litigation; (7) the Internal Revenue Service and Securities Exchange Commission; (8) all financial institutions where the debtor holds an account or maintains a relationship; (9) current employees and/or unions, where applicable; and (10) all taxing authorities in the state, county or local jurisdictions where the debtor conducts business. While the proof of claim form must conform substantially to the appropriate official form, see Fed. R. Bankr. P. 3001(a), often the debtor will utilize a customized proof of claim form that sets forth preprinted information regarding the creditor’s name, address and corresponding schedule information.

Typically, the following persons or entities must file a proof of claim against a debtor prior to the general bar date: (1) any person or entity whose claim against a debtor is not listed in the debtor’s schedules or is listed as disputed, contingent or unliquidated; (2) any person or entity who disagrees with the amount, nature or priority of the claim as set forth on the debtor’s schedules; and (3) in a multi-debtor case, any person or entity who disagrees with the debtor against whom the claim is asserted as set forth in the schedules. A creditor who fails to file a proof of claim on or before the bar date is generally barred from asserting a claim against the debtor that is different from that set forth in the debtor’s schedules, voting on any plan of reorganization in the case and receiving distributions under the reorganization plan. As such, many creditors choose to file a proof of claim even when they are not required to do so.

Each creditor should carefully prepare its proof of claim form with sufficient time to ensure its receipt prior to the applicable bar date by the bankruptcy court or the appointed claims agent in the case. Required information that should be set forth on the claim form includes the amount of the claim as of the filing date, the basis for the claim and the asserted priority of the claim (by either detailing the secured nature of the claim in box four of the form or selecting the appropriate § 507(a) priority basis in box five of the form). In certain instances, the debtor may require that creditors asserting a § 503(b)(9) claim (i.e., a claim arising from the provision of goods to the debtor in the ordinary course of the debtor’s business within 20 days prior to the filing date) include such claim on the general proof of claim form. Creditors are required to attach to the proof-of-claim supporting documentation such as promissory notes, purchase orders, invoices, contracts, calculation of amounts due including rejection damages, complaints, judgments, mortgages and security agreements. Where the supporting documentation is voluminous, a “rider” to the proof of claim form describing such documents may be sufficient. Further, the proof of claim form must be signed and dated.[1] It is advisable to send the proof of claim via a delivery method that produces a receipt (e.g., overnight courier or certified mail, with return receipt requested) and to provide an extra copy of the proof of claim together with a self-addressed, postage prepaid return envelope.

Claims Objections
Following the passing of the general bar date, the debtor customarily undertakes a review of the filed proofs of claim and determines which, if any, will be the subject of an objection. Subject to Rule 3007(d) and unless otherwise ordered by the court, a single objection may not include objections to more than one claim. Fed. R. Bankr. P. 3007(c). Examples of claims objections, which must be included in a single objection, are objections to litigation claims, claims that need to be reclassified to the proper priority, claims that should be asserted against a different debtor and claims that should be reduced in amount based on the debtor’s books and records. However, many debtors will file a motion with the court establishing claims settlement procedures that, if approved by the court, can be used by the debtor to expeditiously resolve claims. With respect to omnibus objections,[2] Rule 3007(d) provides that:

[O]bjections to more than one claim may be joined in an omnibus objection if all claims were filed by the same entity, or the objections are based solely on the grounds that the claims should be disallowed, in whole or in part, because:

(1) they duplicate other claims;
(2) they have been filed in the wrong case;
(3) they have been amended by subsequently filed proofs of claim;
(4) they were not timely filed;
(5) they have been satisfied or released during the case in accordance with the Code, applicable rules, or a court order;
(6) they were presented in a form that does not comply with applicable rules, and the objection states that the objector is unable to determine the validity of the claim because of the noncompliance;
(7) they are interests, rather than claims; or
(8) they assert priority in an amount that exceeds the maximum amount under § 507 of the Code.

Fed. R. Bankr. P. 3007(d).

Upon receipt of an objection, a creditor should locate its claim on the exhibits to the objection and determine whether the creditor agrees. If so, no further steps need be taken. If not, the creditor must file a reply with the bankruptcy court if it is unable to informally reach a resolution to the objection with the debtor’s counsel.

Conclusion
Both a debtor and its creditors have an important stake in the claims process: A debtor determines the overall nature, amount and classification of its claims, which serves as the basis for the preparation of the disclosure statement, plan of reorganization/liquidation and expected creditor recovery scenarios, while the creditor ensures that it will participate in voting on any plan and receiving a timely distribution. Here are a few important tips to keep in mind throughout the process:

1. 1. Carefully review the notice of the bar date and comply with the procedures therein for filing the proof of claim form;
   2. File the proof of claim form well in advance of the applicable bar date to ensure that it is timely received;
   3. Send the completed and executed proof of claim form to the correct recipient (i.e., the bankruptcy court, the appointed claims agent or the debtor’s counsel or financial advisor);
   4. Sign the proof of claim form; and
   5. When representing a claimant, review any omnibus objection received to determine whether an objection has been filed and comply with the procedures for filing any reply.